<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------------------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER
MAY 2, 1999 1-13933
[VLASIC LOGO]
NEW JERSEY 52-2067518
STATE OF INCORPORATION I.R.S. EMPLOYER IDENTIFICATION NO.
VLASIC PLAZA
SIX EXECUTIVE CAMPUS
CHERRY HILL, NEW JERSEY 08002-4112
PRINCIPAL EXECUTIVE OFFICES
TELEPHONE NUMBER: 609-969-7100
----------------------------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
THERE WERE 45,502,234 SHARES OF COMMON STOCK OUTSTANDING AS OF JUNE 1,
1999.
================================================================================
<PAGE> 2
VLASIC FOODS INTERNATIONAL
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION No.
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Earnings (unaudited) for the three and nine month periods
ended May 2, 1999 and May 3, 1998 2
Consolidated Balance Sheets as of May 2, 1999 (unaudited) and August 2, 1998
(audited) 3
Consolidated Statements of Cash Flows (unaudited) for the nine month periods ended
May 2, 1999 and May 3, 1998 4
Consolidated Statements of Shareowners' Equity (Deficit) (unaudited) for the nine
month periods ended May 2, 1999 and May 3, 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Results of Operations and Financial
Condition
Pro Forma Statements of Earnings (unaudited) 12
Management's Discussion and Analysis of Results of Operations and Financial
Condition 13
Item 3. Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE PAGE 25
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
VLASIC FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
May 2, May 3, May 2, May 3,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales (including $34,113 and $39,997 in the
third quarters, respectively, and $117,825 and
$123,629 in the nine months periods,
respectively, to related parties) $ 320,633 $ 320,694 $ 1,004,308 $ 1,043,863
----------- ----------- ----------- -----------
Costs and expenses
Cost of products sold 222,175 231,457 707,923 750,681
Marketing and selling expenses 61,888 55,947 175,868 170,768
Administrative expenses 11,385 17,315 49,031 46,047
Research and development expenses 2,472 1,895 5,920 5,843
Other expenses (income) 164 (123) 738 (214)
Special items 139,785 28,050 136,585 28,050
----------- ----------- ----------- -----------
Total costs and expenses 437,869 334,541 1,076,065 1,001,175
----------- ----------- ----------- -----------
Earnings (loss) before interest and taxes (117,236) (13,847) (71,757) 42,688
Interest expense 11,016 3,374 32,756 4,285
Interest income 124 171 554 316
----------- ----------- ----------- -----------
Earnings (loss) before taxes (128,128) (17,050) (103,959) 38,719
Taxes on earnings 12,000 (452) 19,700 20,406
----------- ----------- ----------- -----------
Earnings (loss) before cumulative effect of
accounting change (140,128) (16,598) (123,659) 18,313
Cumulative effect of accounting change - - - (600)
----------- ----------- ----------- -----------
Net earnings (loss) $ (140,128) $ (16,598) $ (123,659) $ 17,713
=========== =========== =========== ===========
Earnings (Loss) Per Share
Per share - basic $ (3.08) $ (0.37) $ (2.72) $ 0.39
Weighted average shares outstanding - basic 45,500 45,455 45,497 45,455
Per share - assuming dilution $ (3.08) $ (0.37) $ (2.72) $ 0.39
Weighted average shares outstanding
- assuming dilution 45,500(2) 45,455(2) 45,497(2) 46,001
Pro Forma Earnings (Loss) Per Share:(1)
Per share - basic $ (0.46) $ 0.01
Per share - assuming dilution $ (0.46) $ 0.01
</TABLE>
(1) See PRO FORMA STATEMENTS OF EARNINGS on page 12.
(2) Excludes potentially dilutive shares as the result would be antidilutive.
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 4
VLASIC FOODS INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
May 2, August 2,
1999 1998
--------- ---------
(unaudited) (audited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 26,898 $ 16,333
Accounts receivable 165,941 127,644
Inventories 166,092 183,763
Other current assets 17,950 25,200
--------- ---------
Total current assets 376,881 352,940
--------- ---------
Plant assets, net 367,775 520,075
Other assets, principally intangible assets, net 79,375 86,258
--------- ---------
Total assets $ 824,031 $ 959,273
========= =========
Current liabilities
Notes payable $ 7,574 $ 12,535
Payable to suppliers and others 96,116 121,210
Accrued liabilities 82,406 93,330
--------- ---------
Total current liabilities 186,096 227,075
--------- ---------
Long-term debt 580,663 558,873
Deferred income taxes 25,865 19,673
Other liabilities 49,307 47,048
--------- ---------
Total liabilities 841,931 852,669
--------- ---------
Shareowners' equity (deficit)
Preferred stock, no par value; authorized 4,000 shares;
none issued - -
Common stock, no par value; authorized 56,000 shares;
issued 45,502 shares and 45,488 shares at May 2, 1999
and August 2, 1998, respectively 137,758 137,473
Accumulated deficit (148,774) (25,115)
Accumulated other comprehensive earnings (loss) (6,884) (5,754)
--------- ---------
Total shareowners' equity (deficit) (17,900) 106,604
--------- ---------
Total liabilities and shareowners' equity (deficit) $ 824,031 $ 959,273
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 5
VLASIC FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
May 2, May 3,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(123,659) $ 17,713
Non-cash charges to net earnings
Impairment loss 140,000 -
Gain on business sold (3,200) -
Restructuring charges, net (215) 28,050
Depreciation and amortization 34,786 34,701
Deferred income taxes 12,156 (2,383)
Cumulative effect of accounting change - 600
Other, net 2,258 1,125
Changes in working capital
Accounts receivable (60,431) (36,209)
Inventories 5,870 (7,273)
Other current assets and liabilities (6,872) (62,012)
--------- ---------
Net cash provided by (used in) operating activities 693 (25,688)
--------- ---------
Cash flows from investing activities:
Purchases of plant assets (35,583) (39,489)
Sales of plant assets 5,880 5,085
Proceeds from business sold 20,675 -
Business acquired - (6,350)
Other, net 175 465
--------- ---------
Net cash used in investing activities (8,853) (40,289)
--------- ---------
Cash flows from financing activities:
Long-term borrowings 169,085 10,000
Repayment of long-term borrowings (145,800) (25,000)
Short-term borrowings, net (4,736) 16,199
Issuance of common stock 285 -
Net transactions with Campbell - 68,938
--------- ---------
Net cash provided by financing activities 18,834 70,137
--------- ---------
Effect of exchange rate changes on cash (109) (18)
--------- ---------
Net change in cash and cash equivalents 10,565 4,142
Cash and cash equivalents - beginning of period 16,333 9,409
--------- ---------
Cash and cash equivalents - end of period $ 26,898 $ 13,551
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 6
VLASIC FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY (DEFICIT) (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Issued
Common Stock Campbell
-------------------------- Accumulated Net
Shares Amount Deficit Investment
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at August 3, 1997 - $ - $ - $ 633,168
Net earnings prior to spin-off - - - 18,716
Net transactions with Campbell as of the spin-off date:
Assumption of debt, pension and post-retirement
obligations, and net deferred tax liabilities - - - (514,930)
Contribution to capital of remaining Campbell net
investment - 136,954 - (136,954)
Issuance of shares of common stock, no par
value, in connection with the spin-off 45,455 - - -
Net loss after the spin-off - - (1,003) -
Foreign currency translation adjustments - - - -
--------- --------- --------- ---------
Balance at May 3, 1998 45,455 $ 136,954 $ (1,003) $ -
========= ========= ========= =========
Balance at August 2, 1998 45,488 $ 137,473 $ (25,115)
Net loss - - (123,659)
Issuance of shares of common stock
as a result of stock option exercises 14 285 -
Foreign currency translation adjustments - - -
Reclassification adjustment for business sold - - -
--------- --------- ---------
Balance at May 2, 1999 45,502 $ 137,758 $(148,774)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Total
Other Shareowners'
Comprehensive Equity
Earnings (Loss)(1) (Deficit)
------------------ ------------
<S> <C> <C>
Balance at August 3, 1997 $ (870) $ 632,298
Net earnings prior to spin-off - 18,716
Net transactions with Campbell as of the spin-off date:
Assumption of debt, pension and post-retirement
obligations, and net deferred tax liabilities - (514,930)
Contribution to capital of remaining Campbell net
investment - -
Issuance of shares of common stock, no par
value, in connection with the spin-off - -
Net loss after the spin-off - (1,003)
Foreign currency translation adjustments (2,160) (2,160)
--------- ---------
Balance at May 3, 1998 $ (3,030) $ 132,921
========= =========
Balance at August 2, 1998 $ (5,754) $ 106,604
Net loss - (123,659)
Issuance of shares of common stock
as a result of stock option exercises - 285
Foreign currency translation adjustments (453) (453)
Reclassification adjustment for business sold (677) (677)
--------- ---------
Balance at May 2, 1999 $ (6,884) $ (17,900)
========= =========
</TABLE>
(1) Accumulated other comprehensive earnings (loss) consists of foreign currency
translation adjustments and a reclassification adjustment for business sold.
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands)
1. VLASIC FOODS INTERNATIONAL SPIN-OFF FROM CAMPBELL SOUP COMPANY
On March 30, 1998, Campbell distributed one share of Vlasic common stock
to shareowners of Campbell for every ten shares of Campbell capital stock held
at the record date in a tax-free distribution (the "spin-off"). At the time of
the spin-off, we began operations as a separate independent publicly-owned
company. In connection with the spin-off, Campbell contributed the following
businesses: Swanson frozen foods in the U.S. and Canada, Vlasic pickles, Open
Pit barbecue sauce, Campbell mushrooms in the U.S., Freshbake and non-branded
frozen foods and SonA and Rowats pickles and beans in the U.K., Swift and
non-branded processed beef in Argentina and Kattus gourmet foods distribution
(the "Kattus business") in Germany. Our historical financial statements at dates
and for periods ended prior to the date of the spin-off present the combined
historical financial position, results of operations and cash flows of these
businesses. We sold the Kattus business in January 1999. During the third
quarter of fiscal 1999, we entered into a divestiture agreement to sell our
Argentine beef business, Swift-Armour. Prior to the spin-off, the businesses
contributed by Campbell had been separately managed within multiple Campbell
business divisions.
In connection with the spin-off, we incurred incremental debt of
approximately $560 million under a five-year $750 million unsecured revolving
credit facility, consisting of $500 million of indebtedness assumed from
Campbell and $60 million incurred to repay certain intercompany payables
representing advances from Campbell to subsidiaries of Vlasic. On a historical
basis, we were not allocated any amount of Campbell's debt and our historical
financial statements prior to the spin-off do not reflect the interest expense
associated with the debt incurred in connection with the spin-off. Therefore, we
believe that the pro forma statements of earnings appearing on page 12,
reflecting pro forma interest expense as if the spin-off had occurred at the
beginning of fiscal 1998, provide more meaningful comparisons than our
historical financial statements.
For periods prior to the spin-off, our historical financial statements
reflect expenses allocated by Campbell for selling, general and administrative
services (including finance, legal, information systems, research and
development, benefits, facilities and shared sales and distribution support).
Such expenses were allocated based on net sales, utilization or other methods.
The allocated expenses for these services are not necessarily indicative of the
expenses that we would have incurred had we been a separate, independent entity
that managed these functions.
2. INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements for the three
and nine month periods ended May 2, 1999 and May 3, 1998 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In our opinion, all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation of the
consolidated financial statements have been included. The results of the interim
periods are not necessarily indicative of the results to be expected for the
full fiscal year. The consolidated financial statements and footnotes should be
read in conjunction with Management's Discussion and Analysis of Results of
Operations and Financial Condition beginning on page 12 and in our Annual Report
and Form 10-K for the fiscal year ended August 2, 1998.
3. EARNINGS PER SHARE
Earnings per share have been calculated in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Pro forma
earnings per share assume common shares outstanding as of the spin-off date were
outstanding for all periods prior to March 30, 1998.
6
<PAGE> 8
4. COMPREHENSIVE EARNINGS (LOSS)
During the first quarter of fiscal 1999, we adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS 130 established new standards for the
reporting and display of comprehensive earnings and its components; however, the
adoption of SFAS 130 had no impact on our net earnings (loss) or shareowners'
equity (deficit). Comprehensive earnings are defined as the change in
shareowners' equity (deficit) during a period from transactions from
non-shareowner sources. Our comprehensive earnings (loss) consisted of net
earnings (loss) and foreign currency translation adjustments. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.
Comprehensive earnings (loss) for the three and nine month periods ended
May 2, 1999 and May 3, 1998 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
May 2, May 3, May 2, May 3,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings (loss) $(140,128) $ (16,598) $(123,659) $ 17,713
Other comprehensive earnings (loss)
Foreign currency translation adjustments (2,593) (2,758) (453) (2,160)
--------- --------- --------- ---------
Comprehensive earnings (loss) $(142,721) $ (19,356) $(124,112) $ 15,553
========= ========= ========= =========
</TABLE>
5. SPECIAL ITEMS
Special items were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
May 2, May 3, May 2, May 3,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Argentina impairment (Note 7) $(140,000) $ - $(140,000) $ -
Dublin mushroom farm restructuring (Note 6) (3,000) - (3,000) -
Fiscal 1998 restructuring program (Note 6) 3,215 (28,050) 3,215 (28,050)
Kattus gain (Note 7) - - 3,200 -
--------- --------- --------- ---------
Special items $(139,785) $ (28,050) $(136,585) $ (28,050)
========= ========= ========= =========
</TABLE>
Also, during the third quarter of fiscal 1999, we recorded a special
provision for taxes of $7 million on the repatriation of foreign dividends.
6. RESTRUCTURING CHARGES
<TABLE>
<CAPTION>
Loss on Severance
Asset and
Disposition Benefits Other Total
----------- ----------- -------- --------
<S> <C> <C> <C> <C>
Balance at August 2, 1998 $ 14,679 $ 6,951 $ 3,104 $ 24,734
Restructuring accrual 2,400 400 200 3,000
Fiscal 1999 activity to date (17,079) (6,951) (3,104) (27,134)
-------- -------- -------- --------
Balance at May 2, 1999 $ - $ 400 $ 200 $ 600
======== ======== ======== ========
</TABLE>
A special charge of $3 million was recorded in the third quarter of fiscal
1999 associated with the closure of the Dublin, Georgia mushroom farm. The farm
was identified for closure due to the high costs of production and mechanical
harvesting methodology that prevents it from producing high quality retail
mushrooms. As part of the closure, approximately 70 people will be severed. The
assets were written down to the estimated fair value less
7
<PAGE> 9
6. RESTRUCTURING CHARGES (CONTINUED)
costs to sell. The $3 million cost of the program included $2.4 million of
non-cash charges for losses on the disposition of plant assets and $0.6 million
principally related to severance and employee benefit costs that will be paid in
cash. This restructuring program is expected to be completed by the third
quarter of fiscal 2000.
A special charge of $28.1 million ($21.8 million after tax) was recorded
in the third quarter of fiscal 1998 to cover the costs of a restructuring
program. The restructuring program was designed to improve operational
efficiency by exiting certain U.S. and European administrative offices and
production facilities. The restructuring program provided for the reduction of
our worldwide workforce by approximately 425 full-time administrative and
operational positions. In September 1998 we sold our Peterlee frozen foods
facility in the U.K. Additionally, during November 1998, we commenced closing
our seasonal pickle plant in Bridgeport, Michigan. The plant employed
approximately 25 full-time workers and an additional 375 seasonal workers from
May through September. The restructuring charge included approximately $11.6
million primarily related to severance and employee benefit costs that will be
paid in cash. The balance of the restructuring charge, amounting to $16.5
million, related to non-cash charges for losses on the disposition of plant
assets. This program was completed during the third quarter of fiscal 1999.
Third quarter results included a $3.2 million benefit recorded against Special
items within the Statement of Earnings to reverse the remaining unutilized
restructuring charge.
The balance of the restructuring accrual was included in Accrued
liabilities on the Consolidated Balance Sheets as of May 2, 1999.
7. DIVESTED BUSINESSES
As part of our portfolio reconfiguration program, during the third quarter
of fiscal 1999 we entered into a divestiture agreement to sell our Argentine
beef business, Swift-Armour. The sale is subject to satisfaction of legal and
regulatory items and completion of financing. We received approval for the
transaction from our Board of Directors on May 24, 1999. The divestiture is
expected to be completed within our fiscal year ending August 1, 1999. For a
complete description of the pending divestiture, see the Stock Purchase
Agreement included as an Exhibit to our Report on Form 8-K, filed on June 8,
1999. The carrying value of the Argentine beef assets held for sale was reduced
to fair value based on the sale price less costs to sell. Third quarter results
included a $140.0 million charge against Special items within the Statement of
Earnings to reduce the assets held for sale to fair value of which $6.2 million
represented a charge for goodwill impairment with the balance of the charge
recorded against plant assets.
Fourth quarter 1998 earnings included a $14.4 million charge to reduce the
Kattus assets held for sale to fair value. In January 1999, we sold the Kattus
business for a gain on sale of $3.2 million that is recorded on the Special
items line on the Statements of Earnings.
8. SEGMENT AND GEOGRAPHIC AREA INFORMATION
We group our businesses in three operating segments. The FROZEN FOODS
SEGMENT consists of Swanson frozen foods in the U.S. and Canada and Freshbake
frozen foods in the U.K. The GROCERY PRODUCTS SEGMENT includes Vlasic retail and
foodservice pickles and condiments in the U.S., Open Pit barbecue sauce in the
U.S., SonA and Rowats pickles, canned beans and vegetables in the U.K., Kattus
gourmet foods distribution in Germany (which was sold in January 1999) and Swift
canned meat pates and other grocery products in Argentina. The AGRICULTURAL
PRODUCTS SEGMENT includes the U.S. fresh mushroom business, chilled and frozen
beef, frozen cooked beef and canned corned beef exported from Argentina and
contract manufacturing of frozen foodservice product for Campbell's Foodservice
in the U.S. These operating segments are managed as strategic
8
<PAGE> 10
8. SEGMENT AND GEOGRAPHIC AREA INFORMATION (CONTINUED)
units due to their distinct manufacturing processes, marketing strategies and
distribution channels. Corporate expenses and assets have been allocated to the
segments. Intersegment sales presented below as eliminations represent the sale
of beef between Agricultural Products and Frozen Foods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
May 2, May 3, May 2, May 3,
SEGMENT INFORMATION 1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales
Frozen Foods $ 137,420 $ 117,024 $ 421,964 $ 436,617
Grocery Products 105,730 118,098 329,516 342,381
Agricultural Products 78,907 86,951 258,059 272,431
Eliminations (1,424) (1,379) (5,231) (7,566)
----------- ----------- ----------- -----------
Total $ 320,633 $ 320,694 $ 1,004,308 $ 1,043,863
=========== =========== =========== ===========
Earnings (Loss) Before Interest and Taxes
Frozen Foods $ 13,964 $ (3,887) $ 39,552 $ 34,251
Grocery Products 13,895 (6,208) 37,327 12,879
Agricultural Products (145,095) (3,752) (148,636) (4,442)
----------- ----------- ----------- -----------
Total $ (117,236) $ (13,847) $ (71,757) $ 42,688
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
May 2, August 2,
1999 1998
-------- --------
<S> <C> <C>
Total Assets
Frozen Foods $312,620 $286,197
Grocery Products 321,793 374,178
Agricultural Products 189,618 298,898
-------- --------
Total $824,031 $959,273
======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ---------------------------------
May 2, May 3, May 2, May 3,
GEOGRAPHIC INFORMATION 1999 1998 (1) 1999 (1) 1998 (1)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales
United States $ 239,533 $ 207,891 $ 682,835 $ 679,990
Europe 40,731 65,007 183,973 213,285
South America 41,793 49,175 142,731 158,154
Eliminations (1,424) (1,379) (5,231) (7,566)
----------- ----------- ----------- -----------
Total $ 320,633 $ 320,694 $ 1,004,308 $ 1,043,863
=========== =========== =========== ===========
Earnings (Loss) Before Interest and Taxes
United States $ 17,239 $ (309) $ 54,293 $ 50,880
Europe 3,703 (12,256) 11,793 (7,348)
South America (138,178) (1,282) (137,843) (844)
----------- ----------- ----------- -----------
Total $ (117,236) $ (13,847) $ (71,757) $ 42,688
=========== =========== =========== ===========
</TABLE>
(1) Prior quarters' amounts have been reclassified to conform with current year
presentation.
9
<PAGE> 11
9. INVENTORIES
<TABLE>
<CAPTION>
May 2, August 2,
1999 1998
--------- ---------
<S> <C> <C>
Raw materials, containers and supplies $ 59,849 $ 52,074
Finished goods 120,386 144,044
--------- ---------
180,235 196,118
Less: Adjustment to LIFO basis (14,143) (12,355)
--------- ---------
Total $ 166,092 $ 183,763
========= =========
</TABLE>
Inventories determined by the LIFO method represented approximately 61%
and 62% of inventories at May 2, 1999 and August 2, 1998, respectively.
10. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
May 2, August 2,
1999 1998
-------- --------
<S> <C> <C>
Bank borrowings $580,200 $557,000
Capital lease obligations and other 463 1,873
-------- --------
Total $580,663 $558,873
======== ========
</TABLE>
In connection with the spin-off, we incurred incremental debt of
approximately $560 million under a five-year $750 million unsecured revolving
credit facility, consisting of $500 million of indebtedness assumed from
Campbell and $60 million incurred to repay certain intercompany payables
representing advances from Campbell to subsidiaries of Vlasic. We amended the
revolving credit facility on September 30, 1998. As a result of this amendment,
$100 million of indebtedness outstanding under the revolving credit facility was
converted to a term loan and the commitment under the revolving credit facility
was reduced to $550 million. The term loan has the same terms and conditions as
the amended revolving credit facility. Borrowings under the amended revolving
credit facility and the term loan bear interest at rates, which at our option,
vary with the prime rate, CD rate, LIBOR or money market rates plus applicable
credit margins. The average interest rate at May 2, 1999 was 7%. In addition, we
pay a facility fee of 0.50%. The applicable credit margin is based on the timing
of the issuance of longer term debt. The amended agreement contains covenants
including, but not limited to: the mandatory repayment of debt; the reduction of
the commitment upon the sale of assets (including the pending sale of
Swift-Armour in Argentina); issuance of equity and the incurrence of additional
debt; restrictions on the issuance of certain new debt; limitations on capital
spending; restrictions on dividend payments; and certain other financial ratio
covenants. During the third quarter of fiscal 1999, we received a waiver from
the bank group permitting the sale of Swift-Armour in Argentina. At May 2, 1999,
$480.2 million was outstanding under the revolving credit facility and $100
million was outstanding under the term loan, with an additional $69.8 million
available to support our capital requirements including working capital needs
and capital expenditures.
In order to gain greater financial flexibility for the future, we are
amending our existing credit facility, whereby certain financial covenants are
being revised. We expect banks with a majority of the revolving credit
commitment to accept the amendment effective as of June 9, 1999, which, among
other things, increases both the interest rate and the facility fee paid to the
bank group. The amendment also requires the payment of a fee to the bank group
and further restricts future capital spending.
10
<PAGE> 12
11. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In the second quarter of fiscal 1998, we adopted Emerging Issues Task
Force (EITF) Issue 97-13, "Accounting for Costs Incurred in Connection with a
Consulting Contract that Combines Business Process Reengineering and Information
Technology Transformation." The EITF provided that costs of business process
reengineering activities that are part of a systems development project are to
be expensed as incurred. We previously capitalized certain consulting costs
related to business process reengineering. The cumulative effect of this change
in accounting principle was $600 (net of $370 tax), or $(0.01) per diluted share
for the nine months ended May 3, 1998.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
PRO FORMA STATEMENTS OF EARNINGS (UNAUDITED)
(in thousands except per share amounts)
We believe that the Pro Forma Statements of Earnings presented below
produce more meaningful comparisons as the three and nine month periods ended
May 3, 1998 include interest expense on a pro forma basis. Our historical
Statements of Earnings for the three and nine month periods ended May 2, 1999
include interest expense on the incremental debt incurred as of the spin-off.
The pro forma information assumes the spin-off occurred at the beginning of
fiscal 1998. However, the pro forma information is not necessarily indicative of
results that would have occurred if we had been independent since the beginning
of fiscal 1998 or of our future results. The Pro Forma Statements of Earnings
should be read in conjunction with our historical consolidated financial
statements and the related accompanying notes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
May 2, May 3, May 2, May 3,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Actual Pro Forma (1) Actual Pro Forma (1)
<S> <C> <C> <C> <C>
Net sales $ 320,633 $ 320,694 $ 1,004,308 $ 1,043,863
----------- ----------- ----------- -----------
Costs and expenses
Cost of products sold 222,175 231,457 707,923 750,681
Marketing and selling expenses 61,888 55,947 175,868 170,768
Administrative expenses 11,385 17,315 49,031 46,047
Research and development expenses 2,472 1,895 5,920 5,843
Other expenses (income) 164 (123) 738 (214)
Special items 139,785 28,050 136,585 28,050
----------- ----------- ----------- -----------
Total costs and expenses 437,869 334,541 1,076,065 1,001,175
----------- ----------- ----------- -----------
Earnings (loss) before interest and taxes (117,236) (13,847) (71,757) 42,688
Interest expense, net 10,892 9,204 32,202 29,524
----------- ----------- ----------- -----------
Earnings (loss) before taxes (128,128) (23,051) (103,959) 13,164
Taxes on earnings 12,000 (2,273) 19,700 12,778
----------- ----------- ----------- -----------
Net earnings (loss) $ (140,128) $ (20,778) $ (123,659) $ 386
=========== =========== =========== ===========
Net Earnings (Loss) Per Share assuming
dilution $ (3.08) $ (0.46) $ (2.72) $ 0.01
Weighted average shares outstanding assuming
dilution 45,500(2) 45,413(2) 45,497(2) 45,941
</TABLE>
(1) Pro Forma Net Earnings (Loss) for the three and nine month periods ended
May 3, 1998 gives effect to interest expense on incremental debt incurred as
of the spin-off as if it were outstanding for the entire period. The related
tax impact of the pro forma interest expense is included within taxes on
earnings. Pro Forma Net Earnings (Loss) excludes the cumulative effect of
accounting change of a $600 charge recorded during the nine month period ended
May 3, 1998. Pro Forma Net Earnings (Loss) Per Share for the three and nine
month periods ended May 3, 1998 assume common shares outstanding as of the
spin-off date were outstanding for all periods prior to March 30, 1998.
(2) Excludes potentially dilutive shares as the result would be antidilutive.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
On March 30, 1998, Campbell distributed one share of Vlasic common stock
to shareowners of Campbell for every ten shares of Campbell capital stock held
at the record date in a tax-free distribution (the "spin-off"). At the time of
the spin-off, we began operations as a separate independent publicly-owned
company. In connection with the spin-off, Campbell contributed the following
businesses: Swanson frozen foods in the U.S. and Canada, Vlasic pickles, Open
Pit barbecue sauce, Campbell mushrooms in the U.S., Freshbake and non-branded
frozen foods and SonA and Rowats pickles and beans in the U.K., Swift and
non-branded processed beef in Argentina and Kattus gourmet foods distribution
(the "Kattus business") in Germany. Our historical financial statements at dates
and for periods ended prior to the date of the spin-off present the combined
historical financial position, results of operations and cash flows of these
businesses. We sold the Kattus business in January 1999. During the third
quarter of fiscal 1999, we entered into a divestiture agreement to sell our
Argentine beef business, Swift-Armour. Prior to the spin-off, the businesses
contributed by Campbell had been separately managed within multiple Campbell
business divisions.
In connection with the spin-off, we incurred incremental debt of
approximately $560 million under a five-year $750 million unsecured revolving
credit facility, consisting of $500 million of indebtedness assumed from
Campbell and $60 million incurred to repay certain intercompany payables
representing advances from Campbell to subsidiaries of Vlasic. On a historical
basis, we were not allocated any amount of Campbell's debt and our historical
financial statements prior to the spin-off do not reflect the interest expense
associated with the debt incurred in connection with the spin-off. Therefore, we
believe that pro forma statements of earnings appearing on page 12, reflecting
pro forma interest expense as if the spin-off had occurred at the beginning of
fiscal 1998, provide more meaningful comparisons than our historical financial
statements.
Our results have also been affected to a significant extent by a number of
unusual and special, cash and non-cash charges, including: (a) restructuring
charges associated with the implementation of our strategies of reducing costs,
improving operational efficiencies and divesting non-strategic assets; (b)
duplicative expenses arising from transition service charges from Campbell for
certain services (such as payroll, employee benefits administration, information
technology, research and development, customer service and accounting services)
which overlapped our internal expenses until the completion of our
infrastructure; (c) costs incurred by us for the development of an independent
information technology structure; (d) losses on divestiture of the Kattus
business and the pending divestiture of Swift-Armour in Argentina; and (e) tax
on repatriation of foreign dividends.
For periods prior to the spin-off, our historical financial statements
reflect expenses allocated by Campbell for selling, general and administrative
services (including finance, legal, information systems, research and
development, benefits, facilities and shared sales and distribution support).
Such expenses were allocated based on net sales, utilization or other methods.
The allocated expenses for these services are not necessarily indicative of the
expenses that we would have incurred had we been a separate, independent entity
that managed these functions. As described above, Campbell had been providing
certain of these services to us on a transitional basis since the spin-off. We
have established a new corporate infrastructure to operate on a stand-alone
basis, and as of April 1999 we had substantially completed all of the operating
and management systems and capabilities necessary to handle internally the
services that had previously been provided by Campbell.
The discussion below summarizes the significant factors affecting our
consolidated operating results, financial condition and liquidity for the three
and nine months ended May 2, 1999 and May 3, 1998. The results of operations for
the periods prior to the spin-off may not necessarily be indicative of the
results of operations that would have occurred if we had operated as an
independent company prior to the spin-off and are not necessarily indicative of
our future performance. The results for the nine months ended May 2, 1999 are
not necessarily indicative of the results of operations to be expected for the
full year. The following discussion of results of operations and liquidity and
capital resources should be read in conjunction with our historical and pro
forma consolidated financial statements and the related accompanying notes.
13
<PAGE> 15
RESULTS OF OPERATIONS
Overview
Net sales for the first nine months of fiscal 1999 were $1.0 billion, a
decrease of 3.8% from net sales in the first nine months of fiscal 1998.
Excluding sales from the divested Kattus business, net sales decreased 3.2% in
the first nine months of fiscal 1999 compared to last year. Net sales for the
third quarter of fiscal 1999 were $320.6 million, versus $320.7 million a year
ago. Excluding sales from the divested Kattus business, sales increased 5.3% in
the third quarter compared to last year.
Net earnings (loss) for the first nine months of fiscal 1999 were $(123.7)
million compared to $17.7 million for the first nine months of fiscal 1998.
Included within this fiscal 1999 net loss were the following special items and
one-time costs (credits):
- $140.0 million non-cash impairment loss associated with the
pending divestiture of the Swift-Armour Argentine beef business;
- $(3.2) million loss (gain) on the January 1999 sale of the Kattus
business;
- $3.0 million restructuring charge pertaining to the closure of the
Dublin, Georgia mushroom farm;
- $(3.2) million charge (benefit) from completion of the fiscal 1998
restructuring program at amounts less than originally planned;
- $7.0 million tax charge for the impact of the repatriation of
foreign dividends; and
- $7.0 million one-time costs ($4.4 million after tax) for duplicative
administrative transition costs and costs related to the development
of our information technology infrastructure.
Excluding the special items, one-time charges and tax impact of
repatriated dividends described above, net earnings for the first nine months of
fiscal 1999 were $24.3 million, or $0.54 per diluted share. On a comparable
basis, excluding special items of $28.1 million ($21.8 million net of tax) and
one-time costs of $5.5 million ($3.7 million net of tax) recorded during the
first nine months of fiscal 1998, pro forma net earnings, as adjusted for
interest expense, were $25.9 million, or $0.56 per diluted share.
The historical financial statements for the first nine months of fiscal
1998 reflected minimal interest expense prior to the spin-off, as there was no
allocation of interest expense on Campbell's net investment. Subsequent to the
spin-off, interest expense included interest on the debt assumed from Campbell
as well as the debt related to the increase in working capital. We believe the
pro forma financial information appearing on page 12 provides more meaningful
comparisons. Assuming that the spin-off had been consummated as of the beginning
of fiscal 1998, pro forma net interest expense would have been approximately
$29.5 million for the first nine months of fiscal 1998.
For the third quarter of fiscal 1999, the net loss was $(140.1) million,
or $(3.08) per diluted share compared to $(20.8) million in the prior year.
Excluding special items and one-time charges in the third quarter, net earnings
were $6.7 million, or $0.15 per diluted share for fiscal 1999 and $4.8 million,
or $0.10 per diluted share on a pro forma basis, for the third quarter of
fiscal 1998. On May 24, 1999, we announced that we expect our operating
earnings (excluding special items) for our Swanson & Vlasic businesses will be
approximately flat in fiscal 1999 compared to fiscal 1998. However, as with
all forward-looking information, our actual results could differ.
14
<PAGE> 16
Consolidated Statements of Earnings
The following table sets forth certain items in our consolidated statements
of earnings as percentages of our net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- --------------------
May 2, May 3, May 2, May 3,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Cost of products sold 69.3% 72.2% 70.5% 71.9%
Marketing and selling expenses 19.3% 17.4% 17.5% 16.4%
Administrative expenses 3.6% 5.4% 4.9% 4.4%
Research and development expenses 0.8% 0.6% 0.6% 0.6%
Other expenses (income) 0.1% 0.0% 0.1% 0.0%
Special items 43.5% 8.7% 13.5% 2.6%
------ ------ ------ ------
Total costs and expenses 136.6% 104.3% 107.1% 95.9%
------ ------ ------ ------
Earnings (loss) before interest and taxes -36.6% -4.3% -7.1% 4.1%
====== ====== ====== ======
</TABLE>
Three Months Ended May 2, 1999 Compared to Three Months Ended May 3, 1998
Net sales. Net sales were $320.6 million in the third quarter of fiscal
1999 compared to $320.7 million in the third quarter of fiscal 1998. Excluding
sales from the divested Kattus business, net sales increased 5.3% in the third
quarter of fiscal 1999 compared to the same period last year. This overall
increase was primarily due to sales growth experienced in the Swanson U.S.
frozen food business and the Vlasic pickle business of approximately 32.2% and
20.6%, respectively, resulting from our decision last year to align shipments
with consumption, as well as increased consumption beginning in the third
quarter of fiscal 1999. However, these increases were partially offset by sales
declines in the U.K. businesses, Argentina and mushrooms.
Cost of products sold. Cost of products sold as a percentage of net sales
decreased to 69.3% in the third quarter of fiscal 1999 compared to 72.2% in the
same period of the prior year resulting from the benefit of cost savings
programs and lower cattle costs in Argentina in the third quarter of fiscal
1999, partially offset by yield problems at a few of our mushroom farms.
Marketing and selling expenses. Marketing and selling expenses as a
percentage of net sales increased in the third quarter of fiscal 1999 to 19.3%
from 17.4% in the third quarter of fiscal 1998. This increase was principally
due to higher advertising and trade spending in both the Swanson frozen foods
and Vlasic pickle businesses.
Administrative expenses. Administrative expenses as a percentage of net
sales decreased in the third quarter of fiscal 1999 to 3.6% from 5.4% in the
same period of the prior year. The change was primarily attributable to the
reduction of incentive plan programs in the current year and higher costs
related to the development of our information technology infrastructure in the
prior year.
Research and development expenses. Research and development expenses as a
percentage of net sales increased slightly in the third quarter of fiscal 1999
to 0.8% from 0.6% in the same period of fiscal 1998.
Other expenses (income). Other expenses in the third quarter of fiscal
1999 were approximately $0.2 million compared to other (income) in the third
quarter of fiscal 1998 of ($0.1) million.
15
<PAGE> 17
Special items. During the third quarter of fiscal 1999, special items of
$139.8 million were recorded which included the following:
- $140.0 million non-cash impairment loss associated with the
pending divestiture of the Swift-Armour Argentine beef business.
The divestiture, which is subject to satisfaction of legal and
regulatory items and completion of financing is expected to be
completed within our fiscal year ending August 1, 1999;
- $3.0 million restructuring charge pertaining to the closure of the
Dublin, Georgia mushroom farm; and
- ($3.2) million charge (benefit) from completion of the fiscal 1998
restructuring program at amounts less than originally planned.
A special charge of $28.1 million ($21.8 million after tax) was recorded
in the third quarter of fiscal 1998 to cover the costs of a restructuring
program. The restructuring program was designed to improve operational
efficiency by exiting certain U.S. and European administrative offices and
production facilities and was completed in the third quarter of fiscal 1999.
Earnings (loss) before interest and taxes. The loss before interest and
taxes in the third quarter of fiscal 1999 was $(117.2) million compared to a
loss before interest and taxes of $(13.8) million in the third quarter of fiscal
1998. Excluding the third quarter special items discussed above, earnings before
interest and taxes were $22.5 million, or 7.0% of net sales, in the third
quarter of fiscal 1999, compared to $14.2 million, or 4.4% of net sales in the
third quarter of fiscal 1998. The net increase from the same period in the
prior year was driven by:
- increased sales volumes primarily in the Swanson U.S. frozen food
and Vlasic pickles businesses;
- improvements in Argentine cattle costs in the third quarter of
fiscal 1999 compared to the third quarter of fiscal 1998;
- cost savings experienced in our core Swanson and Vlasic businesses;
and
- lower incentive plan expense in fiscal 1999; partially offset by
- yield problems at a few of our mushroom farms.
Interest expense, net. Interest expense, net, for the third quarter of
fiscal 1999 was $10.9 million. The historical financial statements for the third
quarter of fiscal 1998 reflected minimal interest expense prior to the spin-off
as there was no allocation of interest expense on Campbell's net investment.
Subsequent to the spin-off, interest expense included interest on the $500
million of debt assumed from Campbell as well as the $60 million incurred to
repay certain intercompany payables representing advances from Campbell to
Vlasic's subsidiaries. We believe the pro forma financial information appearing
on page 12 provides more meaningful comparisons. Assuming that the spin-off had
been consummated as of the beginning of fiscal 1998, pro forma net interest
expense would have been approximately $9.2 million for the third quarter of
fiscal 1998.
Taxes on earnings. Included in taxes on earnings for the third quarter
fiscal 1999 was $7.0 million for the impact of the repatriation of foreign
dividends. Excluding the impact of our special items and the $7.0 million tax
charge related to the dividend repatriation, the effective tax rate was 42.9% in
the third quarter of fiscal 1999 compared to 52.6% in the third quarter of
fiscal 1998. The fiscal 1999 rate was lower than the fiscal 1998 rate
principally due to losses in Germany for which no tax benefit was available in
fiscal 1998. For fiscal year 1999, we expect an effective tax rate of
approximately 39%, which includes the impact of a new minimum tax law imposed by
the Argentine government in December 1998 on business assets in that country.
Net earnings (loss). Net loss of $(140.1) million, or $(3.08) per diluted
share for the third quarter of fiscal 1999 included special items of $(139.8)
million for the impairment loss and restructuring reserves discussed above and
$(7.0) million for the tax impact on foreign repatriation. Excluding these
items, net earnings for the third quarter of fiscal 1999 were $6.7 million, or
$0.15 per diluted share, compared to pro forma net earnings of $4.8 million
excluding special items and one-time charges, or $0.10 per diluted share, for
the third quarter of fiscal 1998.
16
<PAGE> 18
Nine Months Ended May 2, 1999 Compared to Nine Months Ended May 3, 1998
Net sales. Net sales of $1.0 billion in the first nine months of fiscal
1999 decreased 3.8% from net sales of the first nine months of fiscal 1998.
Excluding sales from the divested Kattus business, net sales decreased 3.2% in
the first nine months of fiscal 1999 compared to last year. The sales decrease
was primarily driven by sales declines in our international businesses,
particularly our businesses in the U.K. and Argentina, which was partially
offset by sales increases in our core Swanson and Vlasic businesses.
Cost of products sold. Cost of products sold as a percentage of net sales
decreased to 70.5% in the first nine months of fiscal 1999 compared to 71.9% in
the same period of the prior year resulting primarily from lower cattle costs in
Argentina in the first nine months of fiscal 1999 and cost savings in the
Swanson and Vlasic plants, which were partially offset by yield problems at a
few of our mushroom farms.
Marketing and selling expenses. Marketing and selling expenses as a
percentage of net sales increased in the first nine months of fiscal 1999 to
17.5% from 16.4% in the first nine months of fiscal 1998. This increase was
primarily caused by greater trade spending resulting from heavier promotions and
new product introductions such as Vlasic Hamburger Stackers and the relaunch of
the Swanson frozen fried chicken line. Partially offsetting this increase was
lower selling costs in the first nine months of fiscal 1999 compared to the same
period last year.
Administrative expenses. Administrative expenses as a percentage of net
sales increased in the first nine months of fiscal 1999 to 4.9% from 4.4% in the
same period of the prior year primarily as a result of duplicative
administrative transition costs and costs related to the development of our
information technology infrastructure experienced in the first and second
quarters of fiscal 1999 which were partially offset by a reduction in
incentive plan programs.
Research and development expenses. Research and development expenses as a
percentage of net sales remained unchanged in the first nine months of fiscal
1999 compared to the same period of fiscal 1998.
Other expenses (income). Other expenses (income) in the first nine months
of fiscal 1998 included a gain on a fire insurance settlement, which was
partially offset by expenses pertaining to a Campbell-related long term
incentive program that ended in fiscal 1998.
Special items. During the first nine months of fiscal 1999, special items
of $136.6 million were recorded which included the following:
- $140.0 million non-cash impairment loss associated with the
pending divestiture of the Swift-Armour Argentine beef business;
- $3.0 million restructuring charge pertaining to the closure of the
Dublin, Georgia mushroom farm;
- $(3.2) million charge (benefit) from completion of the fiscal 1998
restructuring program at amounts less than originally planned; and
- $(3.2) million loss (gain) on the January 1999 sale of the Kattus
business.
A special charge of $28.1 million ($21.8 million after tax) was recorded
in the third quarter of fiscal 1998 to cover the costs of a restructuring
program. The restructuring program was designed to improve operational
efficiency by exiting certain U.S. and European administrative offices and
production facilities and was completed in the third quarter of fiscal 1999.
17
<PAGE> 19
Earnings (loss) before interest and taxes. The loss before interest and
taxes in the first nine months of fiscal 1999 was ($71.8) million compared to
earnings before interest and taxes of $42.7 million in the first nine months of
fiscal 1998. Excluding the fiscal 1999 and 1998 special items discussed above,
earnings before interest and taxes were $64.8 million, or 6.5% of net sales, in
the first nine months of fiscal 1999, compared to earnings before interest and
taxes of $70.7 million, or 6.8% of net sales in the first nine months of fiscal
1998. The net decrease from the same period in the prior year was driven by:
- duplicative administrative transition costs and costs related to the
development of our information technology infrastructure experienced
in the first and second quarters of fiscal 1999;
- increased marketing and advertising costs; and
- yield problems at a few of our mushroom farms; partially offset by
- improvements in Argentine cattle costs experienced in the first nine
months of fiscal 1999 compared to the same period of fiscal 1998;
and
- lower incentive plan expense in fiscal 1999.
Interest expense, net. Interest expense, net, for the first nine months of
fiscal 1999 was $32.2 million. The historical financial statements for the first
nine months of fiscal 1998 reflected minimal interest expense prior to the
spin-off as there was no allocation of interest expense on Campbell's net
investment. Subsequent to the spin-off, interest expense included interest on
the $500 million of debt assumed from Campbell as well as the $60 million
incurred to repay certain intercompany payables representing advances from
Campbell to Vlasic's subsidiaries. We believe the pro forma financial
information appearing on page 12 provides more meaningful comparisons. Assuming
that the spin-off had been consummated as of the beginning of fiscal 1998, pro
forma net interest expense would have been approximately $29.5 million for the
first nine months of fiscal 1998.
Taxes on earnings. Included in taxes on earnings for the first nine months
of fiscal 1999 was $7.0 million for the impact of the repatriation of foreign
dividends. Excluding the impact of our special items and the $7.0 million tax
charge related to dividend repatriation, the effective tax rate was 38.9% in
first nine months of fiscal 1999 compared to 40.0% in the first nine months of
fiscal 1998. For fiscal year 1999, we expect an effective tax rate of
approximately 39% which includes the impact of a new minimum tax law imposed by
the Argentine government in December 1998 on business assets in that country.
For fiscal year 1998, we had an effective tax rate of 41.5% excluding special
items.
Cumulative effect of accounting change. In the second quarter of fiscal
1998, we recorded the cumulative effect of an accounting change of $0.6 million,
after tax, for the adoption of the Emerging Issues Task Force (EITF) Issue
97-13, "Accounting for Costs Incurred in Connection with Consulting Contract
that Combines Business Process Reengineering and Information Technology
Transformation".
Net earnings (loss). Net loss of $(123.7) million, or $(2.72) per diluted
share for the first nine months of fiscal 1999 included special items of
$(136.6) for the impairment loss, restructuring reserves and gain on the sale of
the Kattus business as discussed above and $(7.0) million for the tax impact on
foreign repatriation. Excluding these items and the one-time charges incurred in
the first and second quarters of fiscal 1999, net earnings for the first nine
months of fiscal 1999 were $24.6 million, or $0.54 per diluted share, compared
to pro forma net earnings of $25.9 million, excluding special items and one-time
charges, or $0.56 per diluted share, for the same period of fiscal 1998.
18
<PAGE> 20
Results by Segment
The following table sets forth certain segment information for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
May 2, May 3, May 2, May 3,
SEGMENT INFORMATION 1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales
Frozen Foods $ 137,420 $ 117,024 $ 421,964 $ 436,617
Grocery Products 105,730 118,098 329,516 342,381
Agricultural Products 78,907 86,951 258,059 272,431
Eliminations (1,424) (1,379) (5,231) (7,566)
----------- ----------- ----------- -----------
Total $ 320,633 $ 320,694 $ 1,004,308 $ 1,043,863
=========== =========== =========== ===========
Earnings (Loss) Before Interest and Taxes
Frozen Foods $ 13,964 $ (3,887) $ 39,552 $ 34,251
Grocery Products 13,895 (6,208) 37,327 12,879
Agricultural Products (145,095) (3,752) (148,636) (4,442)
----------- ----------- ----------- -----------
Total $ (117,236) $ (13,847) $ (71,757) $ 42,688
=========== =========== =========== ===========
</TABLE>
Three Months Ended May 2, 1999 Compared to Three Months Ended May 3, 1998
Net sales of the frozen foods segment increased 17.4% to $137.4 million in
the third quarter of fiscal 1999 compared to the third quarter of fiscal 1998.
The increase was driven by sales growth in the Swanson U.S. frozen food business
resulting from higher consumption in the third quarter of fiscal 1999 compared
to the same period of the prior year as well as our decision last year to begin
aligning shipments with consumption. Consumption in this market was slightly
ahead of the same period in the prior year due to increased marketing efforts in
the current year and the introduction of new and improved fried chicken
products. Sales declines in our U.K. frozen food business partially offset this
increase. The segment's earnings before interest and taxes were $14.0 million in
the third quarter of fiscal 1999 compared to a loss of $(3.9) million in the
third quarter of fiscal 1998. Excluding the impact of special items in the third
quarters of fiscal 1999 and 1998, earnings before interest and taxes for this
segment were $11.8 million and $5.8 million, respectively, an increase of
103.8%. This increase was largely a result of greater sales volumes and our cost
savings programs.
Net sales of the grocery products segment decreased 10.5% to $105.7
million in the third quarter of fiscal 1999 compared to the third quarter of
fiscal 1998. Excluding sales from the divested Kattus business, net sales
increased 3.8% in the third quarter of fiscal 1999 compared to the same period
of the prior year. This increase was driven by greater Vlasic pickle volume due
to the introduction of our new Hamburger Stackers. The segment's earnings before
interest and taxes were $13.9 million in the third quarter of fiscal 1999
compared to a loss of $(6.2) million in the third quarter of fiscal 1998.
Excluding the impact of special items in the third quarters of fiscal 1999 and
1998, earnings before interest and taxes for this segment were $15.0 million and
$11.7 million, respectively, an increase of 9.0%. This increase was primarily
attributable to higher sales, cost savings initiatives successfully implemented
and certain start-up costs associated with new technology at the pickles plants
in the third quarter of fiscal 1998.
Net sales of the agricultural products segment decreased 9.3% to $78.9
million in the third quarter of fiscal 1999 compared to the third quarter of
fiscal 1998. Lower Swift-Armour export sales and decreased sales in the U.S.
mushroom business to Campbell Soup Company contributed to the decline. The
segment's loss before interest and taxes was $(145.1) million in the third
quarter of fiscal 1999 compared to a loss of $(3.8) million in the third quarter
of fiscal 1998. Excluding the impact of special items in the third quarters of
fiscal 1999 and 1998, the loss before interest and taxes for this segment was
$(2.1) million and $(3.4) million, respectively. This improvement was due to
lower cattle costs in Argentina in the third quarter of fiscal 1999 compared to
the third quarter of fiscal 1998, which were partially offset by yield problems
experienced at a few of our mushroom farms.
19
<PAGE> 21
Nine Months Ended May 2, 1999 Compared to Nine Months Ended May 3, 1998
Net sales of the frozen foods segment decreased 3.4% to $422.0 million in
the first nine months of fiscal 1999 compared to the first nine months of fiscal
1998. Higher Swanson U.S volumes attributable to new fried chicken products and
increased marketing efforts were partially offset by sales declines in the U.K.
frozen foods business. The segment's earnings before interest and taxes were
$39.5 million in the first nine months of fiscal 1999 compared to $34.2 million
in the first nine months of fiscal 1998. Excluding the impact of special items
recorded in the third quarter of fiscal 1999 and 1998, earnings before
interest and taxes for the segment were $37.4 million and $44.0 million,
respectively, a decrease of 14.8%. This change was driven primarily by lower
volumes in the U.K. and Canada and the allocation of one-time charges for
duplicative administrative transition costs and certain information technology
expenses in fiscal 1999.
Net sales of the grocery products segment decreased 3.8% to $329.5 million
in the first nine months of fiscal 1999 compared to the first nine months of
fiscal 1998. Excluding sales from the divested Kattus business, net sales
decreased 1.7% in the first nine months of fiscal 1999 compared to last year.
This decrease was primarily driven by lower domestic sales in Argentina
resulting from the weakening market conditions as a result of the economic
situation in Brazil, partially offset by increased sales in the Vlasic pickles
business. The segment's earnings before interest and taxes were $37.3 million
for the first nine months of fiscal 1999 compared to $12.9 million in the first
nine months of fiscal 1998. Excluding the impact of special items in the third
quarters of fiscal 1999 and 1998 and the Kattus gain recorded in the second
quarter of fiscal 1999, earnings before interest and taxes for this segment were
$33.0 million and $30.8 million, respectively, an increase of 7.1%. This
increase was due to improvements from sales growth offset by greater marketing
and advertising costs and the allocation of one-time charges for duplicative
administrative transition costs and certain information technology expenses in
fiscal 1999.
Net sales of the agricultural products segment decreased 5.3% to $258.1
million in the first nine months of fiscal 1999 compared to the first nine
months of fiscal 1998 principally due to lower Swift-Armour export sales. The
segment's loss before interest and taxes was $(148.6) million in the first nine
months of fiscal 1999 compared to a loss of $(4.4) million in the same period of
the prior year. Excluding the impact of the special items recorded in the third
quarters of fiscal 1999 and 1998, the loss before interest and taxes for the
segment was $(5.6) million and $(4.0) million, respectively. This was primarily
a result of lower mushroom earnings as a result of yield problems at a few of
our farms, a gain on an insurance settlement in last year's first quarter
and the allocation of one-time charges for duplicative administrative transition
costs and certain information technology expenses. Partially offsetting these
factors were improvements in Argentine cattle costs in the first nine months of
fiscal 1999 compared to the first nine months of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the spin-off, we incurred incremental debt of
approximately $560 million under a five-year $750 million unsecured revolving
credit facility, consisting of $500 million of indebtedness assumed from
Campbell and $60 million incurred to repay certain intercompany payables
representing advances from Campbell to subsidiaries of Vlasic. We amended the
revolving credit facility on September 30, 1998. As a result of this amendment,
$100 million of indebtedness outstanding under the revolving credit facility was
converted to a term loan and the commitment under the revolving credit facility
was reduced to $550 million. The term loan has the same terms and conditions as
the amended revolving credit facility. Borrowings under the amended revolving
credit facility and the term loan bear interest at rates, which at our option,
vary with the prime rate, CD rate, LIBOR or money market rates plus applicable
credit margins. The average interest rate at May 2, 1999 was 7% per annum. In
addition, we pay a facility fee of 0.50%. The applicable credit margin is based
on the timing of the issuance of longer term debt. The amended agreement
contains covenants including, but not limited to: the mandatory repayment of
debt; the reduction of the commitment upon the sale of assets (including the
pending sale of Swift-Armour in Argentina); issuance of equity and the
incurrence of additional debt; restrictions on the issuance of new debt;
limitations on capital spending; restrictions on dividend payments; and certain
other financial ratio covenants. During the third quarter of fiscal 1999, we
received a waiver from the bank group permitting the sale of Swift-Armour in
Argentina. The net proceeds from the pending sale of Swift-Armour would be used
to repay a portion of the outstanding debt under the revolving credit facility
and reduce our revolving credit commitment.
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<PAGE> 22
In order to gain greater financial flexibility for the future, we are
amending our existing credit facility, whereby certain financial covenants are
being revised. We expect banks with a majority of the revolving credit
commitment to accept the amendment effective as of June 9, 1999, which, among
other things, increases both the interest rate and the facility fee paid to
the bank group. The amendment also requires the payment of a fee to the bank
group and further restricts future capital spending.
At May 2, 1999, $480.2 million was outstanding under the revolving credit
facility and $100 million was outstanding under the term loan, with an
additional $69.8 million available to support our capital requirements including
working capital needs and capital expenditures.
Our liquidity needs will be primarily for capital expenditures, working
capital and interest service requirements on our debt obligations. Capital
expenditures for fiscal year 1999 are expected to approximate $50 million, of
which $35.6 million had already been expended as of May 2, 1999. We believe that
our capital expenditures for the foreseeable future will be focused on
preventive maintenance and equipment replacement, projects intended to result in
cost savings and projects related to new product introductions. The amended
revolving credit facility imposes annual limits on capital expenditures which
are expected to be revised as follows: $52 million in fiscal 1999; $41 million
in fiscal 2000; $41 million in fiscal 2001; $42 million in fiscal 2002; and
$42 million in fiscal 2003. The reason for the lower capital spending limits
going forward is the pending divestiture of Swift-Armour in Argentina and the
nearly completed status of our information technology infrastructure.
We anticipate that our operating cash flows, together with available
borrowings under our credit facility, will be sufficient to meet our working
capital requirements, capital expenditure requirements and interest service
requirements on our debt obligations.
Net cash provided by operating activities was $0.7 million in the first
nine months of fiscal 1999 compared to net cash used of $25.7 million in the
first nine months of fiscal 1998. The improvement in cash flows from operations
was principally driven by a smaller seasonal increase in working capital of
$61.4 million in the first nine months of fiscal 1999 compared to $105.5 million
in the first nine months of fiscal 1998, partially offset by the impact of lower
net earnings in the first nine months of fiscal 1999. The increase in
receivables to date has been larger in fiscal 1999 than in fiscal 1998 due to
transition issues related to the conversion from Campbell's systems to our own.
We are taking steps to collect these receivables and expect the balances to be
substantially reduced by fiscal our year-end.
Net cash used in investing activities was $8.9 million in the first nine
months of fiscal 1999 compared to $40.3 million in the first nine months of
1998. Proceeds of $20.7 million from the sale of the Kattus business were used
to pay down debt on our revolving credit facility. Capital expenditures were
$35.6 million in the first nine months of fiscal 1999 compared to $39.5 million
in the same period of the prior year.
Net cash provided by financing activities of $18.8 million in the first
nine months of fiscal 1999 was principally a net increase in borrowings under
the revolving credit facility. Financing activities were used primarily for
working capital requirements.
SEASONALITY
Sales of frozen foods and mushrooms tend to be marginally higher during
the winter months. Sales of pickles, relishes and barbecue sauce tend to be
higher in the summer months. The majority of pickles are packed during a season
extending from May through September. As a result, we tend to have higher sales
in the fourth quarter of the fiscal year and our inventory levels tend to be
higher in the first quarter of the fiscal year which makes our working capital
requirements significantly higher in the first quarter requiring us to draw more
heavily on our revolving credit facility.
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<PAGE> 23
YEAR 2000
The Year 2000 issue is the result of date-sensitive computer programs
using two digits rather than four to define the applicable year. If not
corrected, this could result in system failures or miscalculations leading to
significant disruptions in a company's operations. Prior to our spin-off from
Campbell, a worldwide information technology project was initiated to identify
areas impacted by Year 2000 issues. The purpose of this high-priority project
was to identify and remediate non-ready systems and devices before business
processes were affected. We completed a global business impact assessment and
have plans for timely correction, retirement, replacement or updating of
non-ready systems. We were aided in this effort by the fact that we were only
recently spun-off as an independent entity on March 30, 1998 and many of our
business and information systems in the U.S. have been newly purchased and
implemented with Year 2000 compliant technologies. The implementation of newly
purchased systems was substantially completed as of May 1999.
The actual work of testing and remediating those systems that are not new
has begun. We have completed the work on our identified critical systems and our
other systems have been targeted for completion by July 31, 1999. These phases
of the project were approximately 85% completed as of May 1999. Critical systems
include business planning and control process manufacturing, sales order billing
and warehouse management systems, that, if shut down or interrupted, could have
a material adverse effect on our results of operations, financial condition and
cash flows. We partner with experienced systems integration and Year 2000
vendors in the execution of our Year 2000 master plan.
The project has clear management responsibility, budgets, plans and
reporting requirements. Monthly project tracking and management reporting
processes are in place. The tracking process measures progress (plan versus
actual) for applications at a milestone level. The scope of the project covers
information technology systems, our infrastructure, including plant floor
devices, and our service partners, including logistical operations. An
assessment of our global information technology infrastructure has been
completed and engineers are currently remediating the plant production
facilities. Remediation of the technology infrastructure is targeted for
completion by October 31, 1999 and was approximately 75% completed as of May
1999.
We will test electronic interfaces with trading partners and suppliers as
part of the new system development project, which are scheduled to be completed
by July 31, 1999. Additionally, questionnaires have been sent to major
suppliers. Responses from suppliers are continually evaluated and updated
reports are being requested.
We reviewed the risks of Year 2000 issues and believe the risks are
minimized due to our policy of implementing standard tested and certified Year
2000 systems. The completed risk analysis performed by the independent engineers
for plant non-information technology systems has not identified any significant
risks. Because our Year 2000 compliance is dependent upon key third parties also
being Year 2000 compliant on a timely basis, there can be no guarantee that our
efforts will prevent a material adverse impact on our results of operations,
financial condition and cash flows. The possible consequences of not being fully
Year 2000 compliant include temporary plant closings, delays in the delivery of
finished products, delays in the receipt of key ingredients, containers and
packaging supplies, invoice and collection errors and inventory and supply
obsolescence. These consequences could have a material adverse impact on our
results of operations, financial condition and cash flows if we are unable to
conduct business in the ordinary course. We believe that our readiness program
should significantly reduce the adverse effect any such disruptions may have.
Concurrently with the Year 2000 readiness measures described above, we and
our operating subsidiaries are developing contingency plans intended to mitigate
the possible disruption in business operations that may result from the Year
2000 issue, and are developing cost estimates for such plans. Once developed,
contingency plans and related cost estimates will be continually refined as
additional information becomes available.
The anticipated costs associated with modifying current systems to be Year
2000 compliant will be expensed as incurred; such anticipated costs total $3
million of which approximately $0.9 million was incurred during the first nine
months of fiscal 1999 and $1 million was incurred during fiscal 1998. While
there can be no assurance that we and our suppliers and customers will fully
resolve all Year 2000 issues, neither the estimated cost to become Year 2000
operationally effective nor the outcome of the Year 2000 issue is expected to
have a material impact on our operations, liquidity or financial position.
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<PAGE> 24
RECENT DEVELOPMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. We must adopt the statement in fiscal 2001. We are currently
evaluating the effect that implementation of the new standard will have on our
results of operations and financial position.
FORWARD-LOOKING INFORMATION
This report contains certain forward-looking statements within the meaning
of the Securities Act of 1933 and the Securities Exchange Act of 1934. This
information is based on our current views and assumptions regarding future
events and financial performance and is subject to risks and uncertainties that
could cause actual results to differ materially from those expressed in this
report and filings with the Securities and Exchange Commission. Important facts
that could cause such differences include, but are not limited to:
- - The impact of strong competitive response to our efforts and actions.
- - Market risks associated with financial instruments that may vary due to
the impact of unforeseen economic changes, such as currency exchange
rates, inflation rates and recessionary trends.
- - Changes in prices of raw materials and other inputs.
- - Continued compliance with the covenants and the terms of our amended
credit facility.
- - Our ability to maintain capital expenditures within the forecasted limits.
- - Impact of the Year 2000 issues associated with our business and
information systems and embedded technology as well as the information
technology of our vendors, suppliers, service providers and customers.
- - Implementation and functioning of information technology systems.
- - Inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer
acceptance.
- - Our ability to achieve the forecasted savings related to restructuring
programs.
- - Completion of the divestiture of our Swift-Armour Argentine beef business
in fiscal 1999 which is dependent upon completion of financing and
satisfaction of legal and regulatory items.
- - Global business and economic conditions.
- - Campbell Soup Company's future requirements for mushrooms and foodservice
products.
ITEM 3. MARKET RISK
We use or are permitted to use financial instruments, including fixed and
variable rate debt, as well as swap, forward and option contracts, to finance
our operations and to hedge interest rate and currency exposures. The swap,
forward and option contracts are entered into for periods consistent with
related underlying exposures and do not constitute positions independent of
those exposures. We do not enter into contracts for speculative purposes, nor
are we a party to any leveraged instrument.
As disclosed in our Annual Report, we entered into interest rate swap
contracts with a total notional value of $150 million to hedge a portion of our
U.S. variable interest rate bank borrowings. As of May 2, 1999, the interest
rate swap contracts provided that we pay an average interest rate of 5.9% and
receive an average interest rate of 5.1%. It would have cost approximately $1.6
million to settle the interest rate swap contracts as of May 2, 1999.
During fiscal 1998, we entered into a forward starting swap contract with
a 10 year maturity and a notional amount of $50 million that hedged a portion of
the interest rate exposure associated with the planned issuance of longer term
debt in fiscal 1999. In March 1999, we settled the forward starting swap at no
expense or benefit.
There have been no other material changes in our market risk during nine
months ended May 2, 1999. For additional information, refer to pages 21 and 22
of our Annual Report for the fiscal year ended August 2, 1998.
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PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
As previously reported in our Form 10-K, dated October 20, 1998, we are
not aware of any pending claims or litigation the outcome of which would have a
material adverse effect on our business, financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
A. Cautionary Statement on Forward-Looking statements
This report contains certain forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities Exchange
Act of 1934. This information is based upon our current views and
assumptions regarding future events and financial performance and is
subject to risks and uncertainties that could cause actual results
to differ materially from those expressed in this report. Additional
information concerning factors that could cause actual results to
vary materially from the results anticipated can be found on page 23
in Management's Discussion and Analysis of Results of Operations and
Financial Condition of this Quarterly Report on Form 10-Q and in our
Annual Report on Form 10-K for the fiscal year ended August 2, 1998.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
(10.1) Trust Agreement dated April 12, 1999, by and between Vlasic
Foods International Inc. and Wachovia Bank, N.A. providing for
the funding of certain compensation plans and arrangements
under certain circumstances, including a change of control.
(10.2) Amendment No. 1 to Amended and Restated Credit Agreement
dated as of June 9, 1999.
(27) Financial Data Schedule
B. Reports on Form 8-K
We did not file any reports on Form 8-K during the third quarter of fiscal
1999. We expect to file on June 8, 1999 on Form 8-K information regarding
the planned divestiture of our Swift-Armour business in Argentina.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VLASIC FOODS INTERNATIONAL INC.
Dated: June 8, 1999 By: /s/ Mitchell P. Goldstein
------------------------------------------
Mitchell P. Goldstein
Vice President and Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.1
TRUST AGREEMENT
THIS IS AN AGREEMENT ("Agreement") made April 12, 1999, by and between
VLASIC FOODS INTERNATIONAL INC., a corporation organized under the laws of New
Jersey ("Company"), and WACHOVIA BANK, N.A., a national banking association
("Trustee").
The BACKGROUND of this Agreement is as follows:
1. Company and certain of its affiliates have established and
maintain the plans and arrangements (collectively, the "Plans") listed in
Appendix A, attached hereto and made a part hereof.
2. Company and its affiliates that have adopted the Plans have
incurred or expect to incur liability under the terms of such Plans with respect
to the individuals participating in such Plans. The affiliates that have adopted
the Plans for their eligible employees ("Affiliates") are listed in Appendix B,
attached hereto and made a part hereof.
3. Company wishes to establish a trust (the "Trust") and, along
with its Affiliates, to contribute to the Trust assets that shall be held
therein, subject to the claims of the respective general creditors of Company or
its Affiliates, in the event of the insolvency, as herein defined, of Company or
its Affiliates, until paid to participants in the Plans ("Participants") and
their beneficiaries in such manner and at such times as specified in the Plans.
4. It is the intention of the parties that the Trust established
under this Agreement shall constitute an unfunded arrangement and shall not
affect the status of the Plans as unfunded plans and arrangements maintained for
the purpose of providing deferred
<PAGE> 2
compensation for a select group of management or highly compensated employees
for the purposes of Title I of the Employee Retirement Income Security Act of
1974, as amended.
5. It is also the intention of Company and its Affiliates to make
contributions to the Trust to provide themselves with a source of funds to
assist them in the meeting of their respective liabilities under the Plans.
NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust.
(a) Company and its Affiliates hereby deposit with Trustee in
trust cash and/or marketable securities, if any, reasonably acceptable to
Trustee, which shall become the principal of the Trust to be held, administered
and disposed of by Trustee as provided in this Agreement.
(b) The Trust hereby established is revocable by Company; provided
that it shall become irrevocable upon a Change in Control, as defined in Section
14(e).
(c) The Trust is intended to be a grantor trust, of which Company
and the Affiliates are grantors, within the meaning of subpart E, part I,
subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as
amended ("Code"), and shall be construed accordingly.
(d) The principal of the Trust, and any income, gain or loss
thereon, shall be held separate and apart from other funds of Company and the
Affiliates. A separate account shall be established and maintained for Company
and each of its Affiliates that makes contributions to the Trust. Amounts held
in each such separate account shall be used exclusively for the uses and
purposes of Participants employed by Company or the Affiliate for which the
separate account is
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<PAGE> 3
maintained, the beneficiaries of such Participants, the general creditors of
Company or the Affiliate, or to pay the expenses of the Trust, as herein set
forth. No amount held in a separate account for Participants employed by one
employer may be applied to meet the liabilities to Participants employed by
another employer prior to the date that all obligations of the former have been
fully discharged. Participants and their beneficiaries shall have no preferred
claim on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plans and this Agreement shall be mere unsecured
contractual rights of the Participants and their beneficiaries against the
respective employers of such Participants. Any assets held by the Trustee shall
be subject to the claims of the respective general creditors of Company and its
Affiliates, under federal and state law in the event of insolvency, as defined
in Section 3(a).
(e) Company and any Affiliate may at their discretion and at any
time, or from time to time, make deposits of cash or other property reasonably
acceptable to Trustee in trust with Trustee to augment the principal to be held,
administered and disposed of by Trustee as provided in this Agreement. Prior to
a Change in Control, as defined in Section 14(e), neither Trustee nor any
Participant or beneficiary shall have any right to compel such deposits.
(f) Upon a Change in Control, Company together with each of its
Affiliates shall, as soon as possible, but in no event later than 10 business
days following the Change in Control, as defined in Section 14(e), make an
irrevocable contribution to the Trust in an amount that, together with amounts
then held hereunder, is sufficient to pay each Participant or beneficiary the
benefits to which Participants or their beneficiaries would be entitled pursuant
to the terms of the Plans as of the date on which the Change in Control
occurred. In addition, the Company shall fund a one-time Expense Reserve of
$100,000 at such time to cover the legal, accounting and other costs of the
Trustee.
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<PAGE> 4
(g) Following a Change in Control, Company and its Affiliates
shall continue to make contributions to the Trust to fully fund additional
benefits as they are earned by the Participants under the Plans no less
frequently than monthly, and the Trustee may, in its discretion, compel a
contribution that is required to be made to the Trust under this Section 1(g) or
Section 1(f) or that is necessary to make up any shortfall.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) Company shall deliver to Trustee annually, prior to a Change
in Control, and at least annually after a Change in Control, a schedule (the
"Payment Schedule") that indicates the amounts payable in respect of each
Participant (and his or her beneficiaries), and that provides a formula or other
instructions acceptable to Trustee for determining the amounts so payable, the
form in which such amount is to be paid (as provided for or available under the
Plans), and the time of commencement for payment of such amounts. Except as
otherwise provided herein, Trustee shall make payments to Participants and their
beneficiaries in accordance with such Payment Schedule. The Trustee shall make
provision for the reporting and withholding of any federal, state or local taxes
that may be required to be withheld with respect to the payment of benefits
pursuant to the terms of the Plans and shall pay amounts withheld to the
appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by Company or an Affiliate, it being understood
among the parties hereto that Company, on behalf of itself and Affiliates, (i)
shall on a timely basis provide Trustee with specific information as to the
amount of taxes to be withheld and (ii) shall be obligated to make provisions to
receive such withheld taxes from Trustee and properly pay and report such
amounts to the appropriate taxing authorities.
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<PAGE> 5
(b) The entitlement of a Participant or his or her beneficiaries
to benefits under the Plans shall be determined by Company or such party as it
shall designate under the Plans, and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plans; provided,
however, that following a Change in Control, the final benefit determination
with respect to both entitlement and the amount and timing of benefits for the
Participants and their beneficiaries shall be the sole responsibility of the
Trustee.
(c) Company or its Affiliate may make payment of benefits directly
to Participants or their beneficiaries as they become due under the terms of the
Plans. Company, on behalf of itself and the Affiliates, shall notify Trustee of
the decision to make payment of benefits directly prior to the time amounts are
payable to Participants or their beneficiaries. In addition, if the principal of
the Trust, and any income thereon, are not sufficient to make payments of
benefits in accordance with the terms of the Plans, Company or its Affiliates
shall make the balance of each payment as it falls due, to the extent of their
respective obligations under the Plans. Trustee shall notify Company when
principal and income are not sufficient.
(d) Trustee shall not be liable for payments or liabilities of the
Plans in excess of the fair market value of the Trust's assets.
Section 3. Trustee Responsibility Regarding Payments to Participants and
Beneficiaries When Company or Affiliate Is Insolvent
(a) Trustee shall cease payment of benefits to Participants and
their beneficiaries if the Company or the Affiliate that is liable under the
Plans to pay benefits to those Participants, as the case may be, is insolvent.
Company or its Affiliate shall be considered "insolvent" for purposes of this
Agreement if (i) Company or its Affiliate is unable to pay its
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<PAGE> 6
debts as they become due, or (ii) Company or its Affiliate is subject to a
pending proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided
in Section 1(d) hereof, the principal and income of the respective separate
accounts under the Trust shall be subject to claims of general creditors of
Company or its Affiliates under federal and state law as set forth below.
(1) The board of directors and the chief executive
officer of each of the Company and the Affiliates (or, if there is no chief
executive officer, the highest ranking officer) shall have the duty to inform
Trustee in writing of the insolvency of Company or its Affiliate, as
appropriate. If a person claiming to be a creditor of Company or an Affiliate
alleges in writing to Trustee that it has become insolvent, Trustee shall
determine whether Company or Affiliate is insolvent. Upon receiving notice from
Company or the Affiliate, or from a person claiming to be a creditor, and
pending determination of insolvency, Trustee shall discontinue payment of
benefits to Participants to whom Company or Affiliate is liable for benefits
under the Plans, and alleged to be insolvent, or the beneficiaries of such
Participants.
(2) Unless Trustee has actual knowledge of the insolvency
of Company or its Affiliate, or has received notice from Company, Affiliate, or
a person claiming to be a creditor alleging that Company or Affiliate is
insolvent, Trustee shall have no duty to inquire whether Company or Affiliate is
insolvent. Trustee may in all events rely on such evidence concerning the
solvency of Company or Affiliate as may be furnished to Trustee and that
provides Trustee with a reasonable basis for making a determination concerning
solvency of Company or Affiliate.
-6-
<PAGE> 7
(3) If at any time Trustee has determined that Company or
its Affiliate is insolvent, Trustee shall discontinue payments to Participants
(and their beneficiaries) to whom Company or its Affiliate, as appropriate, is
liable to pay benefits under the Plan, and shall hold the assets of the separate
account under the Trust for that entity for the benefit of the general creditors
of such entity. Nothing in this Agreement shall in any way diminish any rights
of Participants or their beneficiaries to pursue their respective rights as
general creditors of Company and its Affiliates with respect to benefits due
under the Plans or otherwise.
(4) Trustee shall resume the payment of benefits to
affected Participants or their beneficiaries in accordance with Section 2 of
this Agreement only after Trustee has determined that Company or its Affiliate
is not insolvent (or is no longer insolvent).
(c) Provided that there are sufficient assets in the appropriate
separate account, if Trustee discontinues the payment of benefits from the Trust
pursuant to Section 3(b) hereof and subsequently resumes such payments, the
first payment following such discontinuance shall include the aggregate amount
of all payments due to affected Participants or their beneficiaries under the
terms of the Plans for the period of such discontinuance, less the aggregate
amount of any payments made to Participants provided for hereunder during any
such period of discontinuance, plus interest on such difference based on the
average interest rate in effect for 30-day Treasury bills over such period of
discontinuance; provided that Company or its Affiliate has given Trustee the
information with respect to such payments made during the period of
discontinuance prior to resumption of payments by Trustee.
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<PAGE> 8
Section 4. Payments to Company and Affiliates.
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, Company and its Affiliates shall have no right or power to direct
Trustee to return to them or to divert to others any of the Trust assets before
all payments of benefits have been made to Participants and their beneficiaries
from the respective separate accounts pursuant to the terms of the Plans.
Section 5. Investment and Administrative Authority.
(a) Trustee may invest in securities (including stock or rights to
acquire stock) or obligations issued by Company or its Affiliates; provided that
only securities or obligations issued by the Company or an Affiliate may be held
in the separate account for the Company or such an Affiliate. All rights
associated with assets of the Trust shall be exercised by Trustee or the person
designated by Trustee, and shall in no event be exercised by, or vest with,
Participants, except that voting rights with respect to Trust assets will be
exercised by Company unless an investment adviser has been appointed pursuant to
Section 5(c) and voting authority has been delegated to such investment adviser.
(b) Company and its Affiliates shall have the right at any time,
and from time to time, in the sole discretion of each, to substitute assets of
equal fair market value for any asset held by the Trust that is attributable to
it. This right is exercised by Company or Affiliates in a nonfiduciary capacity
without the approval or consent of any person in a fiduciary capacity. Following
a Change in Control, any substitution of assets must be acceptable to the
Trustee.
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<PAGE> 9
(c) The Company may appoint one or more investment advisers to
provide investment advice on a discretionary or nondiscretionary basis with
respect to all or a specified portion of the assets of the Trust. Appointed
investment advisers must be registered as investment advisers under the
Investment Advisers Act of 1940. Following a Change in Control, the Trustee may
appoint one or more investment advisers, who may be affiliates of Trustee.
Should the Trustee appoint the investment adviser(s), the Trustee shall remain
fully liable for all investments of the Trust, and all fees, expenses or other
compensation to be paid to such advisers from Trust assets shall be fully
disclosed in advance to Company.
(d) Trustee, or Trustee's designee, is authorized and empowered:
(1) To invest and reinvest Trust assets, together with
the income therefrom, in common stock, preferred stock, convertible preferred
stock, bonds, debentures, convertible debentures and bonds, mortgages, notes,
commercial paper and other evidences of indebtedness (including those issued by
Trustee in its corporate capacity), shares of mutual funds (which funds may be
sponsored, managed or offered by an Affiliate of Trustee), guaranteed investment
contracts, bank investment contracts, other securities, policies of life
insurance, annuity contracts, options to buy or sell securities or other assets,
and all other property of any type (personal or real and tangible or
intangible);
(2) To deposit or invest all or any part of the assets of
the Trust in savings accounts, certificates of deposit or other deposits in a
bank or savings and loan association or other depository institution, including
Trustee or any of its affiliates; provided that, with respect to such deposits
with Trustee or an affiliate, the deposits bear a reasonable rate of interest;
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<PAGE> 10
(3) To hold, manage, improve, repair and control all
property, real or personal, forming part of the Trust; to sell, convey,
transfer, exchange, partition, lease for any term, even extending beyond the
duration of this Trust, and otherwise dispose of the same from time to time;
(4) To hold in cash, for a reasonable period of time,
such portion of the Trust as is pending investment, or payment of expenses, or
the distribution of benefits;
(5) To take such actions as may be necessary or desirable
to protect the Trust from loss due to the default on mortgages held in the
Trust, including the appointment of agents or trustees in such other
jurisdictions as may seem desirable, to transfer property to such agents or
trustees, to grant to such agents such powers as are necessary or desirable to
protect the Trust, to direct such agent or trustee, or to delegate such power to
direct, and to remove such agent or trustee;
(6) To settle, compromise or abandon all claims and
demands in favor of or against the Trust;
(7) To exercise all of the further rights, powers,
options and privileges granted, provided for, or vested in trustees generally
such that the powers conferred upon Trustee herein shall not be in limitation of
any authority conferred by law, but shall be in addition thereto;
(8) To borrow money from any source and to execute
promissory notes, mortgages or other obligations and to pledge or mortgage any
trust assets as security; and
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<PAGE> 11
(9) To maintain accounts at, execute transactions
through, and lend on an adequately secured basis stocks, bonds or other
securities to, any brokerage or other firm, including any firm that is an
affiliate of Trustee.
Section 6. Additional Powers of Trustee.
To the extent necessary or to the extent to which it deems appropriate
to implement its powers under Section 5 or otherwise to fulfill any of its
duties and responsibilities as Trustee of the Trust, Trustee shall have the
following additional powers and authority:
(a) To register securities, or any other property, in its name or
in the name of any nominee, including the name of any affiliate or the nominee
name designated by any affiliate, with or without indication of the capacity in
which property shall be held, or to hold securities in bearer or book-entry form
and to deposit any securities or other property in a depository or clearing
corporation;
(b) To designate and engage the services of, and to delegate
powers and responsibilities to, such agents, representatives, advisers, counsel
and accountants as Trustee considers necessary or appropriate, any of whom may
be an affiliate of Trustee or a person who renders services to such an
affiliate, and, as a part of its expenses under this Agreement, to pay their
reasonable expenses and compensation; provided that all such expenses and
compensation are fully disclosed in advance to Company;
(c) To make, execute and deliver, as Trustee, any and all deeds,
leases, mortgages, conveyances, waivers, releases or other instruments in
writing necessary or appropriate for the accomplishment of any of the powers
listed in this Agreement; and
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<PAGE> 12
(d) Generally to do all other acts that Trustee deems necessary or
appropriate for the protection of the Trust.
Section 7. Disposition of Income.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
Section 8. Accounting by Trustee.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made for each
separate account, including such specific records as shall be agreed upon in
writing between Company and Trustee. Within 90 days following the close of each
calendar year and within 90 days after the removal or resignation of Trustee,
Trustee shall deliver to Company a written account of its administration of the
Trust during such year or during the period from the close of the last preceding
year to the date of such removal or resignation, setting forth all investments,
receipts, disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be. Trustee may satisfy its obligation under this
Section 8 by rendering to Company monthly statements setting forth the
information required by this Section separately for the month covered by the
statement.
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<PAGE> 13
Section 9. Responsibility and Indemnity of Trustee.
(a) Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims; provided, however, that
Trustee shall incur no liability to any person for any action reasonably taken
pursuant to a direction, request or approval given by Company or its Affiliate
that is reasonably contemplated by, and in conformity with, the terms of the
Plans and this Agreement and is given in writing. Trustee shall also incur no
liability to any person for failure to act in the absence of direction, request
or approval from Company or its Affiliate that is reasonably contemplated by,
and in conformity with, the terms of this Agreement. In the event of a dispute
between Company or its Affiliate and a third party, Trustee may apply to a court
of competent jurisdiction to resolve the dispute.
(b) Company hereby indemnifies Trustee, and each of its affiliates
identified to the Company in advance in writing as rendering services hereunder
(together with the Trustee, "Indemnified Trustee Party") in accordance with the
terms of this Agreement against, and shall hold them harmless from, any and all
loss, claims, liability, and expense, including reasonable attorneys' fees,
imposed upon or incurred by any Indemnified Trustee Party as a result of any
acts taken, or any failure to act, in accordance with the directions from
Company or any designee of Company, or by reason of the Indemnified Trustee
Party's good faith execution of its duties with respect to the Trust, including,
but not limited to, its holding of assets of the Trust, Company's obligations in
the foregoing regard to be satisfied promptly by Company; provided that in the
event the loss, claim, liability or expense involved is determined by a no
longer appealable final judgment entered in a lawsuit or proceeding to have
resulted from the gross
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<PAGE> 14
negligence, willful misconduct, lack of good faith or breach of fiduciary duty
of any Indemnified Trustee Party, Indemnified Trustee Party shall promptly on
request thereafter return to Company or Affiliate, as appropriate, any amount
previously received by Trustee under this Section with respect to such loss,
claim, liability or expense. If Company or Affiliate does not pay such costs,
expenses and liabilities in a reasonably timely manner, Indemnified Trustee
Party may obtain payment from the appropriate separate account under the Trust
without direction from Company or its Affiliate.
(c) Trustee and each other Indemnified Trustee Party hereby
indemnify Company, its parents, subsidiaries and Affiliates, and each of their
respective officers, directors, and employees ("Indemnified Company Party"),
from and against all loss, claims, liability, and expense, including reasonable
attorneys' fees, imposed upon or incurred by any Indemnified Company Party as a
result of the gross negligence, willful misconduct, lack of good faith or breach
of fiduciary duty of Trustee or any other Indemnified Trustee Party.
(d) Trustee may consult with legal counsel (who may also be
counsel for Company generally) in carrying out its duties or obligations
hereunder.
(e) Trustee may hire and may rely on the advice given by agents,
accountants, actuaries, investment advisers, financial consultants or other
professionals to assist it in performing any of its duties or obligations
hereunder.
(f) Trustee shall have, without exclusion, all powers conferred on
Trustee by applicable law, unless expressly provided otherwise herein; provided,
however, that if an insurance policy is held as an asset of the Trust, Trustee
shall have no power to name a beneficiary of the policy other than the Trust, to
assign the policy (as distinct from conversion of
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<PAGE> 15
the policy to a different form) other than to a successor Trustee, or to lend to
any person the proceeds of any borrowing against such policy.
(g) However, notwithstanding the provisions of Section 9(f) above,
Trustee may lend to Company the proceeds of any borrowing against an insurance
policy held as an asset of the Trust.
(h) Notwithstanding any powers granted to Trustee pursuant to this
Agreement or to applicable law, Trustee shall not have any power that could make
this Trust a "Business Trust," and not an "Ordinary Trust," within the meaning
of Section 301.7701 - 4(a) and (b) of the Procedure and Administrative
Regulations promulgated pursuant to the Code.
Section 10. Compensation and Expenses of Trustee.
Company shall pay all administrative and Trustee's fees and expenses in
accordance with a fee agreement between the parties. If not so paid, the fees
and expenses shall be paid from the Trust. Trustee is authorized, unless
otherwise agreed by Trustee, to withdraw from the Trust without direction from
Company the amount of its fees in accordance with the fee agreement between
Company and Trustee.
Section 11. Resignation or Removal of Trustee.
(a) Subject to Section 11(d), Trustee may resign at any time by
written notice to Company, which shall be effective 30 days after receipt of
such notice unless Company and Trustee agree otherwise.
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<PAGE> 16
(b) Subject to Section 11(c), Trustee may be removed by Company on
30 days notice or upon shorter notice accepted by Trustee.
(c) Upon a Change in Control, as defined in Section 14(e) herein,
Trustee may be removed by Company only after two years from the Change in
Control, and Company shall select a successor Trustee in accordance with the
provisions of Section 12(b) hereof prior to the effective date of the Trustee's
removal.
(d) If Trustee resigns within two years after a Change in Control,
as defined in Section 14(e) herein, Company shall select a successor Trustee in
accordance with the provisions of Section 12(b) hereof prior to the effective
date of the Trustee's resignation.
(e) Upon resignation or removal of Trustee and appointment of a
successor Trustee, all Trust assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed within 60 days after receipt
of notice of resignation, removal or transfer, unless Company extends the time
limit.
(f) If Trustee resigns or is removed, a successor shall be
appointed in accordance with Section 12 hereof, by the effective date of
resignation or removal under paragraph (a) or paragraph (b) of this section. If
no such appointment has been made, Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All reasonable
expenses of Trustee in connection with the proceeding shall be allowed as
administrative expenses of the Trust.
(g) Upon settlement of the account and transfer of the Trust
assets to the successor trustee, all rights and privileges under this Agreement
shall vest in the successor
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<PAGE> 17
trustee and all responsibility of Trustee with respect to the Trust and assets
thereof shall terminate subject only to the requirement that Trustee execute all
necessary documents to transfer the Trust assets to the successor trustee.
Section 12. Appointment of Successor.
(a) If Trustee resigns or is removed in accordance with Section
11(a) or (b) hereof, Company may appoint any third party, such as a bank trust
department or other party that may be granted corporate trustee powers under
state or federal law, as a successor to replace Trustee. The appointment shall
be effective when accepted in writing by the new Trustee, who shall have all of
the rights and powers of the former Trustee, including legal ownership rights in
the Trust assets. The former Trustee shall execute any instrument necessary or
reasonably requested by Company or the successor trustee to evidence the
transfer.
(b) If Trustee resigns or is removed by Company after a Change in
Control in accordance with Section 11(c) or (d), the Company shall select a
successor Trustee. Company may appoint any third party, such as a bank trust
department, with a market capitalization exceeding $10,000,000,000 that may be
granted corporate trustee powers under state or federal law. The appointment of
a successor Trustee shall be subject to the ratification of a majority of the
Participants in the Plans. The majority of Participants shall be determined
based on the Participants' account balances under the Plans. The appointment of
the successor Trustee and the resignation or removal of the former Trustee shall
be effective when the appointment is accepted in writing by the new Trustee. The
new Trustee shall have all the rights and powers of the former Trustee,
including legal ownership rights in Trust assets. The former Trustee shall
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<PAGE> 18
execute any instrument necessary or reasonably requested by the successor
Trustee to evidence the transfer.
(c) The successor Trustee need not examine the records and acts of
any prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 8 and 9 hereof. The successor Trustee shall not be responsible for any
claim or liability resulting from any action or inaction of any prior Trustee or
from any other past event, or any condition existing at the time it became
successor Trustee.
Section 13. Amendment or Termination.
(a) This Agreement may be amended by a written instrument executed
by Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of any of the Plans or shall make the Trust revocable
after it has become irrevocable in accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which
Participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plans, unless sooner revoked in accordance with Section 1(b)
hereof. Nor shall the Trust terminate before all expenses of the Trust have been
paid. Upon termination of the Trust, any assets remaining in a separate account
under the Trust for Company or an Affiliate shall be returned to Company or the
Affiliate, as appropriate.
(c) Upon written approval of all Participants or beneficiaries
entitled to payment of benefits pursuant to the terms of the Plans, Company may
terminate this Trust prior
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<PAGE> 19
to the time all benefit payments under the Plans have been made. Upon
termination of the Trust, and after payment of all fees and expenses of the
Trust, any assets remaining in a separate account under the Trust for Company or
an Affiliate shall be returned to the Company or the Affiliate, as appropriate.
(d) Notwithstanding any other provision in this Agreement, this
Agreement may not be amended within two years after the occurrence of a Change
in Control, as defined in Section 14(e), without the approval of a majority of
the Participants, determined as provided in Section 12(b), except when necessary
to comply with legal or regulatory requirements necessary to maintain the
tax-deferred status of benefits for the Participants.
Section 14. Miscellaneous.
(a) Any provision of this Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Participants and their beneficiaries under
the Plans or this Trust may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) Notwithstanding anything to the contrary contained elsewhere
in this Agreement, any reference to the Plans or provisions of the Plans that
require knowledge or interpretation of the Plans shall impose a duty upon the
Company to communicate such knowledge or interpretation to the Trustee. The
Trustee shall have no obligation to know or
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<PAGE> 20
interpret any portion of the Plans and shall in no way be liable for any proper
action taken contrary to the Plans.
(d) This Agreement shall be governed by and construed in
accordance with the laws of New Jersey.
(e) For purposes of this Agreement, "Change in Control" shall
mean:
(1) The acquisition in one or more transactions by any
"Person" (as the term is used for purposes of Section 13(d) or Section 14(d) of
the Securities Exchange Act of 1934, as amended (the "1934 Act")) of "Beneficial
Ownership" (within the meaning of Rule 13d - 3 promulgated under the 1934 Act)
of twenty-five percent (25%) or more of the combined voting power of Company's
then outstanding voting securities (the "Voting Securities"); provided, however,
that for purposes of this Section 14(e), the Voting Securities acquired directly
from Company by any Person shall be excluded from the determination of such
Person's Beneficial ownership of Voting Securities (but such Voting Securities
shall be included in the calculation of the total number of Voting Securities
outstanding); or
(2) The individuals who, as of the later of April 1, 1998
or the first date that the membership of the board of directors of the Company
reaches seven, are members of the board of directors (the "Incumbent Board"),
cease for any reason to constitute at least two-thirds of the board of
directors; provided, however, that if the election, or nomination for election
by Company's shareowners, of any new director was approved by a vote of at least
two-thirds of the Incumbent Board, such new director shall, for purposes of the
Plan, be considered as a member of the Incumbent Board; or
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<PAGE> 21
(3) Approval by shareowners of Company of (i) a merger or
consolidation involving Company if the shareowners of Company, immediately
before such merger or consolidation, do not own, directly or indirectly,
immediately following such merger or consolidation, more than eighty percent
(80%) of the combined voting power of the outstanding Voting Securities of the
corporation resulting from such merger or consolidation in substantially the
same proportion as their ownership of the Voting Securities outstanding
immediately before such merger or consolidation or (ii) a complete liquidation
or dissolution of Company or an agreement for the sale or other disposition of
all or substantially all of the assets of Company; or
(4) Acceptance by shareowners of Company of shares in a
share exchange if the shareowners of Company, immediately before such share
exchange, do not own, directly or indirectly, immediately following such share
exchange, more than eighty percent (80%) of the combined voting power of the
outstanding Voting Securities of the corporation resulting from such share
exchange in substantially the same proportion as their ownership of the Voting
Securities outstanding immediately before such share exchange.
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because twenty-five percent (25%) or more of the then
outstanding Voting Securities is acquired by (i) a trustee or other fiduciary
holding securities under one or more employee benefit plans maintained by
Company or any of its subsidiaries, (ii) any entity that, immediately prior to
such acquisition, is entirely owned (directly or indirectly) by shareowners of
Company in the same proportions as their ownership of stock in Company
immediately prior to such acquisition, (iii) any "Grandfathered Dorrance Family
shareowner" (as hereinafter defined) or (iv) any Person who has acquired such
Voting Securities directly from any Grandfathered Dorrance Family
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<PAGE> 22
shareowner but only if such Person has executed an agreement that is approved by
two-thirds of the board of directors of Company and pursuant to which such
Person has agreed that he or she (or they) will not increase his or her (or
their) Beneficial Ownership (directly or indirectly) to thirty percent (30%) or
more of the outstanding Voting Securities (the "Standstill Agreement") and only
for the period during which the Standstill Agreement is effective and fully
honored by such Person. For purposes of this Section, "Grandfathered Dorrance
Family shareowner" means at any time a "Dorrance Family shareowner" (as
hereinafter defined) who or which is at the time in question the Beneficial
Owner solely of (v) Voting Securities beneficially owned by such individual on
April 1, 1998, (w) Voting Securities acquired directly from Company, (x) Voting
Securities acquired directly from another Grandfathered Dorrance Family
shareowner, (y) Voting Securities that are also Beneficially Owned by other
Grandfathered Dorrance Family shareowners at the time in question, and (z)
Voting Securities acquired after April 1, 1998 other than directly from Company
or from another Grandfathered Dorrance Family shareowner by any "Dorrance
Grandchild" (as hereinafter defined); provided that the aggregate amount of
Voting Securities so acquired by each such Dorrance Grandchild shall not exceed
five percent (5%) of the Voting Securities outstanding at the time of such
acquisition. A "Dorrance Family shareowner" who or which is at the time in
question the Beneficial Owner of Voting Securities that are not specified in
clauses (v), (w), (x), (y) and (z) of the immediately preceding sentence shall
not be a Grandfathered Dorrance Family shareowner at the time in question. For
purposes of this Section, "Dorrance Family shareowners" means individuals who
are descendants of the late Dr. John T. Dorrance, Sr. and/or the spouses,
fiduciaries and foundations of such descendants. A "Dorrance Grandchild" means,
as to each particular grandchild of the late Dr. John T. Dorrance, Sr., all of
the following taken collectively: such grandchild, such grandchild's
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<PAGE> 23
descendants and/or the spouses, fiduciaries and foundations of such grandchild
and such grandchild's descendants.
Moreover, notwithstanding the foregoing, a Change in Control shall not
be deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the outstanding Voting
Securities as a result of the acquisition of Voting Securities by Company that,
by reducing the number of Voting Securities outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Person; provided
that if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of Voting Securities by Company, and after such
share acquisition by Company, the Subject Person becomes the Beneficial Owner of
any additional Voting Securities that increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur.
WHEREFORE, the parties hereto have caused their respective authorized
officers to execute this Agreement as of the date first above written.
WACHOVIA BANK, N.A. VLASIC FOODS INTERNATIONAL INC.
By:_________________________________ By:_________________________________
Name:_______________________________ Name:_______________________________
Title:______________________________ Title:______________________________
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<PAGE> 24
APPENDIX A
1. Director Compensation Plan
2. Deferred Compensation Plan
3. Supplemental Employees' Retirement Plan.
4. Mid-Career Hire Pension Agreement with Robert F. Bernstock.
5. Special Severance Protection Program
6. Severance Protection Agreement with Robert F. Bernstock
<PAGE> 25
APPENDIX B
Affiliates
Vlasic Foods, Inc.
Vlasic Farms, Inc.
Vlasic International Brands Inc.
Vlasic International Sales Inc.
Aligar, Inc.
Cargal, Inc.
Vlasic Standards, Inc.
Vlasic Foods Distribution Company
VF Brands, Inc.
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 1 TO
AMENDED AND RESTATED CREDIT AGREEMENT
AMENDMENT dated as of June 9, 1999 to the Amended and Restated Credit
Agreement dated as of September 30, 1998 (the "CREDIT AGREEMENT") among VLASIC
FOODS INTERNATIONAL INC. (the "COMPANY"), the BANKS party thereto, THE CHASE
MANHATTAN BANK, as Syndication Agent, and MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Administrative Agent (in such capacity, the "ADMINISTRATIVE AGENT") and
Collateral Agent.
W I T N E S S E T H :
WHEREAS, the parties hereto desire to amend the Credit Agreement to
increase the interest rates and fees payable thereunder and to revise the
financial and certain other covenants;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Defined Terms; References.
(a) Unless otherwise specifically defined herein, each term used herein
which is defined in the Credit Agreement has the meaning assigned to such term
in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and
"hereby" and each other similar reference and each reference to "this Agreement"
and each other similar reference contained in the Credit Agreement shall, after
this Amendment becomes effective, refer to the Credit Agreement as amended
hereby.
(b) The definition of "BASE RATE MARGIN" is amended as follows:
(i) paragraph (c) thereof is amended to read as follows:
(c) for each day during the period from and including
April 1, 1999 to but excluding July 1, 1999, a rate per annum
equal to 1.000%;
(ii) paragraph (d) thereof is amended to read as follows:
(d) for each day during the period from and including
July 1, 1999 to but excluding the Grid Pricing Commencement
Date:
<PAGE> 2
(i) if the Partial Refinancing shall have
been completed and the Company shall have issued
Subordinated Debt in an aggregate principal amount of
at least $200,000,000, a rate per annum equal to
1.000%; and
(ii) otherwise, a rate per annum equal to
1.250%.
(c) The definition of "CD MARGIN" is amended as follows:
(i) paragraph (c) thereof is amended to read as follows:
(c) for each day during the period from and including
April 1, 1999 to but excluding July 1, 1999, a rate per annum
equal to 2.125%;
(ii) paragraph (d) thereof is amended to read as follows:
(d) for each day during the period from and including
July 1, 1999 to but excluding the Grid Pricing Commencement
Date:
(i) if the Partial Refinancing shall have
been completed and the Company shall have issued
Subordinated Debt in an aggregate principal amount of
at least $200,000,000, a rate per annum equal to
2.125%; and
(ii) otherwise, a rate per annum equal to
2.375%.
(d) The definition of "CONSOLIDATED INTEREST EXPENSE" is amended by
adding the expression "(excluding any debt issuance costs)" after the words
"interest expense" in clause (i) thereof.
(e) The definition of "CONSOLIDATED NET EARNINGS" is amended by adding
the words "and to exclude the effect of any debt issuance costs" after the words
Anon-recurring gain (but not loss)".
(f) The definition of "EURO-DOLLAR MARGIN" is amended as follows:
(i) paragraph (c) thereof is amended to read as follows:
(c) for each day during the period from and including
April 1, 1999 to but excluding July 1, 1999, a rate per annum
equal to 2.000%;
(ii) paragraph (d) thereof is amended to read as follows:
2
<PAGE> 3
(d) for each day during the period from and including
July 1, 1999 to but excluding the Grid Pricing Commencement
Date:
(i) if the Partial Refinancing shall have
been completed and the Company shall have issued
Subordinated Debt in an aggregate principal amount of
at least $200,000,000, a rate per annum equal to
2.000%; and
(ii) otherwise, a rate per annum equal to
2.250%.
(g) The definition of "FACILITY FEE RATE" is amended as follows:
(i) paragraph (b) thereof is amended by replacing the words
"Grid Pricing Commencement Date" with the words "First Amendment
Effective Date"; and
(ii) paragraph (c) thereof is re-lettered as paragraph (d) and
the following is added as paragraph (c):
(c) for each day during the period from and including
the First Amendment Effective Date to but excluding the Grid
Pricing Commencement Date, a rate per annum equal to 0.500%;
and
(h) The following definitions are added to Section 1.01 in the
appropriate alphabetical order:
(i) "FIRST AMENDMENT BANK" means each Bank that delivers to
the Administrative Agent on or before 5:00 p.m. (New York City time),
on the later of (a) June 8, 1999 and (b) the date that the
Administrative Agent notifies the Banks that the First Amendment
Effective Date has occurred, a counterpart of Amendment No. 1 to this
Agreement dated as of June 9, 1999 signed by such party, or facsimile
or other written confirmation (in form satisfactory to the
Administrative Agent) that such party has signed a counterpart thereof.
(ii) "FIRST AMENDMENT EFFECTIVE DATE" has the meaning set
forth in Amendment No. 1 to this Agreement dated as of June 9, 1999.
SECTION 2. Ratio-Based Pricing Schedule. The Ratio-Based
Pricing Schedule to the Credit Agreement is replaced by the Ratio-Based
Pricing Schedule attached hereto.
3
<PAGE> 4
SECTION 3. Fees. Section 2.08(b) of the Credit Agreement is
amended as follows:
(a) The following is added as paragraph (iv):
(iv) The Company shall, on the later of June 9, 1999
and the first Domestic Business Day following the First
Amendment Effective Date, pay to the Administrative Agent for
the account of each First Amendment Bank an additional fee
equal to 0.25% of 58% of such First Amendment Bank's Credit
Exposure on such date.
(b) The following is added as paragraph (v):
(v) Unless the Partial Refinancing shall have been
completed and the Company shall have issued Subordinated Debt
in an aggregate principal amount of at least $200,000,000 on
or before July 31, 1999, the Company shall, on August 1, 1999,
pay to the Administrative Agent for the account of each First
Amendment Bank an additional fee equal to 0.25% of 30% of such
First Amendment Bank's Credit Exposure on the First Amendment
Effective Date.
(c) The following is added as paragraph (vi):
(vi) Unless the Company shall have prepaid not less
than $80,000,000 of Loans with the Net Cash Proceeds of the
sale of Swift-Armour Sociedad Anonima Argentina on or before
July 31, 1999, the Company shall, on August 1, 1999, pay to
the Administrative Agent for the account of each First
Amendment Bank an additional fee equal to 0.25% of 12% of such
First Amendment Bank's Credit Exposure on the First Amendment
Effective Date.
SECTION 4. Mortgages on Real Property of Domestic Vlasic
Companies . Section 5.08(a)(iv) of the Credit Agreement is amended by
replacing each occurrence of the date "July 1, 1999" with the date
"August 1, 1999".
SECTION 5. Debt/EBITDA Ratio. The table in Section 5.13 of the
Credit Agreement is amended to read as follows:
4
<PAGE> 5
<TABLE>
<CAPTION>
FISCAL QUARTER RATIO
-------------- -----
<S> <C>
Fourth Fiscal Quarter of Fiscal 1999 4.50 to 1
First Fiscal Quarter of Fiscal 2000 4.75 to 1
Second Fiscal Quarter of Fiscal 2000 4.75 to 1
Third Fiscal Quarter of Fiscal 2000 4.75 to 1
Fourth Fiscal Quarter of Fiscal 2000 4.25 to 1
Each Fiscal Quarter thereafter 4.00 to 1
</TABLE>
SECTION 6. Fixed Charge Coverage Ratio. The table in Section
5.14 of the Credit Agreement is amended to read as follows:
<TABLE>
<CAPTION>
FISCAL QUARTER RATIO
-------------- -----
<S> <C>
Fourth Fiscal Quarter of Fiscal 1999 2.50 to 1
Each Fiscal Quarter of Fiscal 2000 2.25 to 1
Each Fiscal Quarter of Fiscal 2001 2.50 to 1
Each Fiscal Quarter thereafter 3.00 to 1
</TABLE>
SECTION 7. Capital Expenditures. The table in Section 5.16 of
the Credit Agreement is amended to read as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C>
1999 $52,000,000
2000 $41,000,000
2001 $41,000,000
2002 $42,000,000
2003 $42,000,000
</TABLE>
SECTION 8. Representations of the Company. The Company
represents and warrants that (i) the representations and warranties of
the Company set forth in Article 4 of the Credit Agreement will be true
on and as of the First Amendment Effective Date and (ii) no Default
will have occurred and be continuing on such date.
SECTION 9. Governing Law. This Amendment shall be governed by
and construed in accordance with the laws of the State of New York.
SECTION 10. Counterparts. This Amendment may be signed in any
number of counterparts, each of which shall be an original, with the
same effect as if the signatures thereto and hereto were upon the same
instrument.
SECTION 11. Effectiveness. This Amendment shall become
effective as of the date hereof on the later of June 9, 1999 and the
date when the Administrative Agent shall have received (a) from each of
the
5
<PAGE> 6
Company, each Domestic Subsidiary and the Required Banks a counterpart
hereof signed by such party or facsimile or other written confirmation
(in form satisfactory to the Administrative Agent) that such party has
signed a counterpart hereof and (b) an opinion of the General Counsel
of the Company, in form and scope satisfactory to the Administrative
Agent, as to the due authorization and validity and binding effect of
this Amendment (the "FIRST AMENDMENT EFFECTIVE DATE").
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the date first above written.
VLASIC FOODS INTERNATIONAL INC.
By:______________________________
Name:
Title:
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK
By:______________________________
Name:
Title:
THE CHASE MANHATTAN BANK
By:______________________________
Name:
Title:
BANK OF AMERICA NT&SA
By:______________________________
Name:
Title:
BANK OF MONTREAL
By:______________________________
Name:
Title:
7
<PAGE> 8
BARCLAYS BANK PLC
By:______________________________
Name:
Title:
CITIBANK, N.A.
By:______________________________
Name:
Title:
DEUTSCHE BANK AG NEW YORK
and/or CAYMAN ISLANDS
BRANCHES
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By:______________________________
Name:
Title:
8
<PAGE> 9
FLEET NATIONAL BANK
By:______________________________
Name:
Title:
MELLON BANK, N.A.
By:______________________________
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION
By:______________________________
Name:
Title:
WACHOVIA BANK, N.A.
By:______________________________
Name:
Title:
THE BANK OF NEW YORK
By:______________________________
Name:
Title:
9
<PAGE> 10
THE BANK OF NOVA SCOTIA
By:______________________________
Name:
Title:
FIRST UNION NATIONAL BANK
By:______________________________
Name:
Title:
SUNTRUST BANK, ATLANTA
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
WESTDEUTSCHE LANDESBANK
GIROZENTRALE NEW YORK
BRANCH
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
10
<PAGE> 11
BANCA NAZIONALE DEL LAVORO
S.p.A.-NEW YORK BRANCH
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
11
<PAGE> 12
CONFIRMED AND AGREED TO:
ALIGAR, INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
CARGAL, INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
VLASIC FOODS DISTRIBUTION COMPANY
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
12
<PAGE> 13
VLASIC FARMS, INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
VLASIC FOODS, INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
VF BRANDS, INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
13
<PAGE> 14
VLASIC INTERNATIONAL BRANDS INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
VLASIC STANDARDS, INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
VLASIC INTERNATIONAL SALES INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
14
<PAGE> 15
RATIO-BASED PRICING SCHEDULE
For any day on or after the Grid Pricing Commencement Date, each of
"FACILITY FEE Rate", "EURO-DOLLAR MARGIN", "CD MARGIN" and "BASE RATE MARGIN"
means the rate per annum set forth below in the applicable row opposite such
term and in the column corresponding to the "Pricing Level" that applies for
such day.
If on or before such day, the Partial Refinancing shall have been
completed and the Company shall have issued Subordinated Debt in an aggregate
principal amount of at least $200,000,000, the following table shall apply for
such day:
<TABLE>
<CAPTION>
Level I Level II Level III Level IV Level V Level VI Level VII
------- -------- --------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Facility Fee Rate 0.150% 0.200% 0.250% 0.250% 0.375% 0.500% 0.500%
Euro-Dollar Margin 0.350% 0.550% 0.875% 1.250% 1.500% 1.750% 2.000%
CD Margin 0.475% 0.675% 1.000% 1.375% 1.625% 1.875% 2.125%
Base Rate Margin 0 0 0 0.250% 0.500% 0.750% 1.000%
</TABLE>
Otherwise, the following table shall apply for such day:
<TABLE>
<CAPTION>
Level I Level II Level III Level IV Level V Level VI Level VII
------- -------- --------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Facility Fee Rate 0.150% 0.200% 0.250% 0.250% 0.375% 0.500% 0.500%
Euro-Dollar Margin 0.600% 0.800% 1.125% 1.500% 1.750% 2.000% 2.250%
CD Margin 0.725% 0.925% 1.250% 1.625% 1.875% 2.125% 2.375%
Base Rate Margin 0 0 0.125% 0.500% 0.750% 1.000% 1.250%
</TABLE>
For purposes of this Schedule, the following terms have the following
meanings:
"APPLICABLE DEBT/EBITDA RATIO" means, on any day, the Debt/EBITDA Ratio
at the end of the most recently ended Fiscal Quarter for which the Company has
delivered financial statements pursuant to Section 5.01(a) or 5.01(b); provided
that, if a Default exists under Section 5.01(a), 5.01(b) or 5.01(c) on such day,
the Applicable Debt/EBITDA Ratio for such day shall be deemed to be greater than
4.0 to 1.
"LEVEL I PRICING" applies for any day if, on such day, the Applicable
Debt/EBITDA Ratio is less than 1.5 to 1.
1
<PAGE> 16
"LEVEL II PRICING" applies for any day if, on such day, the Applicable
Debt/EBITDA Ratio is greater than or equal to 1.5 to 1 but less than 2.0 to 1.
"LEVEL III PRICING" applies for any day if, on such day, the Applicable
Debt/EBITDA Ratio is greater than or equal to 2.0 to 1 but less than 2.5 to 1.
"LEVEL IV PRICING" applies for any day if, on such day, the Applicable
Debt/EBITDA Ratio is greater than or equal to 2.5 to 1 but less than 3.0 to 1.
"LEVEL V PRICING" applies for any day if, on such day, the Applicable
Debt/EBITDA Ratio is greater than or equal to 3.0 to 1 but less than 3.5 to 1.
"LEVEL VI PRICING" applies for any day if, on such day, the Applicable
Debt/EBITDA Ratio is greater than or equal to 3.5 to 1 but less than 4.0 to 1.
"LEVEL VII PRICING" applies for any day if, on such day, no other
Pricing Level applies.
"PRICING LEVEL" refers to the determination of which of Level I, Level
II, Level III, Level IV, Level V, Level VI or Level VII Pricing applies for any
day.
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS FOR THE NINE MONTHS ENDED MAY 2, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-01-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> MAY-02-1999
<CASH> 26,898
<SECURITIES> 0
<RECEIVABLES> 171,806
<ALLOWANCES> 5,865
<INVENTORY> 166,092
<CURRENT-ASSETS> 376,881
<PP&E> 744,219
<DEPRECIATION> (376,444)
<TOTAL-ASSETS> 824,031
<CURRENT-LIABILITIES> 186,096
<BONDS> 588,237
0
0
<COMMON> 137,758
<OTHER-SE> (155,658)
<TOTAL-LIABILITY-AND-EQUITY> 824,031
<SALES> 1,004,308
<TOTAL-REVENUES> 1,004,308
<CGS> 707,923
<TOTAL-COSTS> 1,076,065
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,756
<INCOME-PRETAX> (103,959)
<INCOME-TAX> 19,700
<INCOME-CONTINUING> (123,659)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (123,659)
<EPS-BASIC> (2.72)
<EPS-DILUTED> (2.72)
</TABLE>
